Trading the Bear Pennant Pattern
We said earlier that you are advised to wait for a breakout to take place before entering the long trade to protect yourself from a potential reversal. Remember that until the breakout takes place, the bear pennant is still in “draft” mode and the price action can always reverse the trend and break out higher.
Chart patterns provide us with two options for entry. Either we enter the market as soon as the breakout candle closes below the lower line of the pennant, or eventually decide to wait for a throwback, when the price action returns to the “crime scene” to retest the broken pennant.
The latter offers a great risk-reward since the entry is at a higher price and the stop loss is very close to the entry, hence, you are risking very few pips. The former makes sure that you don’t miss out on a trade, as there are no guarantees that a throwback may take place at all, which is exactly what happens in this case.
The strength of this trend could be connected to the fact that the buyers registered multiple failures to clear the horizontal resistance, which made them exhausted and exposed. Hence, the breakout was really strong, without offering us the second option.
Therefore, entry is located where the breakout candle closed. A stop loss is placed within the territory of a pennant, as any move and close above the supporting line invalidates the pattern.
Take profit is defined by copy-pasting the flagpole, from the point of the breakout (the diagonal trend line). The end point of the trend line signals a level where the bear pennant pattern is completed.
Given the overall strength of the downtrend, our take profit order is hit in a matter of a few days. We risked around 20 pips in this trade to earn 110 pips, which makes this an extremely attractive trading setup.