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.
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