How to Trade the Bull Pennant Pattern

The bull pennant is a bullish continuation pattern that signals the extension of the uptrend after the period of consolidation is over.

 

Unlike the flag where the price action consolidates within the two parallel lines, the pennant uses two converging lines for consolidation until the breakout occurs. 

As you will see from our example below, trading the pennants is a very similar process to trading flags. In this blog post we look at what a bull pennant is, its structure, strengths and weaknesses. At a later stage we will also share tips on how to trade a bull pennant and make profit. 

What the Bull Pennant Shows Us 

The bullish pennant is very similar to a bullish flag. Both consist of two phases: a strong uptrend and consolidation. However, the latter phase takes the form of a wedge or triangle in the case of the pennant, unlike the flag where we have a channel. 

The consolidation phase must stem from an uptrend, otherwise it’s just a normal triangle. Hence, the move higher is classified as flagpole, with a pennant coming on top of it. 

Following the establishment of a short-term peak, the price action starts to consolidate below the highs. Two converging lines connect the higher lows and the lower highs, until these two intersect. In this case, the breakout must take place, unlike the bull flag where the consolidation within the two parallel lines can take much longer.

 

 

Similar to flags, both the bull and bear pennants consist of three main elements: 

 

The flagpole - the asset’s price must trade higher in a series of the higher highs and higher lows;
Pennant - a consolidation phase takes place between the two converging lines;
A breakout - a break of the upper trend line activates the pattern, while a break of the supporting line invalidates the formation.

As not one market move happens in a straight vertical fashion, the dominating side must play a tactical game and take breaks between the aggressive moves. Hence, the buyers want to consolidate their recent gains and allow for a minor correction lower. After a temporary pause, the price tends to breakout in an explosive manner. 

Similar to a bull flag, the consolidation phase shouldn’t surpass the 50% Fibonacci retracement of the prior leg higher (the flagpole). A pullback that extends below 50% signals that the uptrend is not as strong as it should be. Hence, a strong bull pennant corrects to around 38.2% before breaking the upper trend line.

Strengths and Weaknesses

The bullish pennant is a continuation pattern as it tends to help the existing uptrend extend higher. In essence, the pennant helps traders identify the stage at which the trend is currently in. Therefore, it is much easier to trade the pennant, as trading levels are precisely defined by the two converging lines and a flagpole.

A formation that checks all three boxes (flagpole, a pennant, and a breakout) with a correction ending at around 38.2% is a textbook bullish pennant pattern. The shorter and milder the correction, the stronger the uptrend and the ultimate breakout usually is. 

Pennants share the same weakness with flags, as the prolonged consolidation phase can result in a reversal pattern. For this reason, it is important not to enter the trade before the breakout occurs and to always consult other technical indicators in confirming the breakout.

Spotting the Bull Pennant Pattern

As a continuation pattern, the key in spotting the bull pennant lies in identifying a clean uptrend first. The uptrend is defined as a series of the higher highs and higher lows. If the consolidation then takes the form of a pennant, we must be ready to dip into the market as soon as the breakout occurs. 

We see one example in the EUR/USD hourly chart below. The buyers are forcing the price movements higher in a very aggressive manner. After the short-term peak is in place, the price action starts correcting mildly lower. You can see that the form of this correction is triangular, meaning that EUR/USD created a few lower highs and higher lows.

 

 

This is a textbook bull pennant chart formation. As the uptrend is strong, the temporary pause is rather short and the bulls are full of confidence and eager to extend the trend higher.

 

Just a few hours after the consolidation had started, it actually ended with a powerful bullish candle that burst through the upper line.

Trading the Bull Pennant Pattern

We noted earlier that a trader is advised to wait for a breakout to take place before entering the long trade. This is advised to protect yourself from a potential reversal, as consolidation may result in the change of a trend direction, rather than a continuation. Hence, the pennant chart pattern is in “draft” mode until the breakout takes place. 

 

 

As is the case with all candlestick chart patterns, we have two options for an entry. You can open a trade as soon as the breakout candle closes above the upper line of the pennant i.e. the close is confirmed. Contrary, you can eventually opt 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 lower 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. 

As you can see from the EUR/USD chart above, the throwback never took place, which is not surprising given the overall strength of the initial uptrend. The buyers simply forced a breakout and never looked back. As a matter of fact, they created ten consecutive bullish candles on an hourly chart. 

 

The first option is more secure and we take it. The entry is placed at a price where the breakout closes, while the stop loss is located just below the breakout candle and the wedge. In general, the stop loss is located below the upper line - the resistance - however, the triangle in this case is very narrow as two trend lines have almost intersected when the breakout took place. 

Take profit is defined by copy-pasting the flagpole, from a point of the breakout (the diagonal trend line). The end point of the trend line signals a level where the bull pennant pattern is completed. A couple of hours since we entered the trade, our take profit order is activated. We completed a trade with a gain of 120 pips, compared to the 30 pips that we risked, which translates into a phenomenal 1:4 risk-reward ratio.