What is Flag chart pattern?
Pennants are chart patterns, formed by price action, that is contained within a small symmetrical triangle. This is created when there’s a minor profit booking, in either an uptrend or a downtrend.
How does it work?
The pennant patterns are similar to flags, with the main difference being that the patterns are formed as converging trend lines into a triangle. The bullish and bearish pennant chart patterns work on the same principles as the flag patterns. This pattern is formed because of minor increase in one of the two great forces that affect the prices, demand and supply. In an uptrend, as the target area or the resistance area is approached, there is increased selling. As the supply tends to increase, the rising price halts. In a down trend, as the target area or the support area is approached, increased buying is observed. As the demand increases, the price fall halts. Pennants are actually short-term triangles. They form with lower highs and higher lows, over one to five weeks. The line through the peaks and the line through the troughs converge and the pattern is completed by a break outside the converging lines.
How to Trade with Pennant pattern?
- As shown above, before the flag-like pennant forms, the price experiences a sharp rise. This is known as the pennant’s ‘pole’.
- Bullish pennants occur just after a sharp rise in price and resemble a triangular flag as the price moves sideways, making gradually lower highs and higher lows. The uptrend then continues with another similar-sized rise in price.
- Enter your long trade as soon as a candlestick has closed above the pennant’s upper trend line.
- Place your stop loss on the other side of the pennant, just below its lower trend line.