Trading Guides Technical Analysis
By Stelian Olar, Updated on: Jul 12 2024.
Have you ever noticed a bullish price move suddenly slow down and move sideways for a while, only to break out upwards again with renewed momentum?
As a trader, seeing this candlestick pattern unfold can signal a potentially profitable trading opportunity. This temporary consolidation phase amidst an uptrend is called the bullish pennant - and learning to recognize them can add a useful weapon to your chart patterns arsenal.
In this article, we’ll explore:
- What makes up a bull pennant pattern,
- Why bull pennant form,
- And most importantly - how traders can take advantage of the bullish pennant pattern.
By the end, you’ll understand the dynamics behind bullish pennants and how to implement basic bull pennant trading strategies. Whether you’re an experienced price action trader or just starting to learn chart patterns, this guide aims to give you actionable knowledge to spot and profit from bullish pennants.
So why should you care about mastering the bull pennant chart pattern?
Well, when traded properly, these temporary pauses present opportunities to enter into momentum moves at an optimal point. The consolidation builds energy for the next leg up and identifying that coming breakout quickly allows you to ride renewed buying pressure.
By breaking down real chart examples and detailing a complete trading plan, you’ll gain confidence in trading these temporary pullbacks within an uptrend. So read on to upgrade your price action trading with a versatile new weapon by transforming this pattern from abstract chart shape into tradable strategy.
What is a Bullish Pennant Pattern
A bull pennant forms during a strong upside price move, signaling a temporary pause and potential continuation of the prevailing trend. It gets its name from the pennant shape created by two converging trend lines.
Specifically, an uptrend runs into selling pressure and goes into a sideways consolidation. The lower boundary is the support level formed by the pullback lows and the upper trend line connects the high points of the contracting range.
As this pennant is forming, the tightening range resembles a pennant shape angling down.
In technical analysis, pennants fall under the category of consolidation patterns signaling a balanced tug-of-war between buyers and sellers during an uptrend.
Contrast this to bearish pennants on the short side, which are the opposite pattern but still continuation patterns.
Bull Pennant Pattern Components
Understanding the anatomy of a bull penant gives us confidence we’re actually seeing a pennant and not a different triangle chart pattern or pennant formation.
A textbook bull flag pennant has three main components:
Pole:
The pole is the strong prior uptrend or price surge that builds momentum coming into the pattern. This forms the base that the bull pennant flag will later break out from. Look for a sharp surge with expanding volume and minimal pullbacks.
Pennant (Flag):
The flag is the consolidation after that initial surge. Selling pressure kicks in to pause the uptrend. This forms the actual pennant shape as the range contracts under resistance trendlines and support lows. Volume should dry up during flag formation.
Breakout:
The breakout triggers when upside momentum resumes - penetration above the pennant triggers fast moves upwards. Breakout volume expands supporting the move.
Being able to visually identify these three stages goes a long way when scanning charts for bullish penant trading setups. The best patterns show all components clearly on the price chart.
How Accurate Is a Bullish Pennant
Pennant patterns have an overall favorable probability but entering the trade still carries uncertainty.
So how can we tilt the odds further in our favor?
The key is combining the pennant with other confluent factors.
Here are some tips to filter for higher probability bull pennants:
- Analyze the strength of the prior trend - a sharp, straight-line pole signals committed upside momentum. Weak, winding poles are less reliable.
- Focus on pennants forming in liquid markets with ample volatility - low volume markets can false breakout.
- Use other indicators to confirm buying pressure - bullish crossovers, upturn momentum, rising moving averages all align with continuation.
- Watch for breakout points to exceed the original pole's peaks - breaking previous resistance makes new highs likely.
- Trade pullback entries after initial breakouts for better risk/reward - don't chase right away.
Layering these confluent factors makes for a more robust pennant setup because the chart pattern itself only signals potential. Combining it with momentum metrics, volume analysis, and risk management vastly improves your accuracy.
The key is having a complete trade plan detailing entries, stop losses, profit targets, and conditional exit points. With a structured approach, even 60-70% probability pennants can yield solid returns over many trades.
It's not just pattern accuracy - it's how you act on those patterns.
What Is the Success Rate of Bullish Pennant
When evaluating any bullish pennant chart pattern, traders naturally want to know - what are my odds this works out?
Having a sense of the expected success rate helps assess trades.
So what does the data say?
Overall, statistics show the bull pennant tends to resolve less favorably. One comprehensive study analyzing hundreds of pennants found that the average price rise around 7% after the initial breakout to the upside.
Failed Bullish Pennant
The failure rate for up breakouts was above 50 percent.
Now, that study includes all chart occurrences - both high probability and low probability versions. Poorly formed bullish consolidation patterns bring down overall performance. Key factors like the strength of the prior uptrend pole and the tightness of contraction impact outcomes.
What Happens After a Bull Pennant
Once a bull pennant completes, the natural next question is - what happens next? We just saw a contraction pattern where price consolidated in a tight range - so which direction ultimately breaks out?
Remember, pennants are considered continuation patterns. The prevailing expectation is for price to resume the original uptrend once the bullish pennant flag runs its course. So in most cases, we expect the equilibrium to resolve with a bullish breakout.
Specifically, there are a few key things to analyze after pennant formation:
- The Breakout - The most critical event is the price breaks from the pennant structure. A valid breakout sees price closing outside the pattern with expanding volume.
- Meeting Price Targets - Initial upside targets project off the size of the "pole" before consolidation. Typically we see the resumption reach about the same height as the original move.
- Further Momentum - Strong rising pennants will show follow-through after early targets hit.
- Change of Polarity - Sometimes after modest runs, post-pennant price will top out and change character. Trend traders exit positions as uptrend turns to choppy consolidation.
So in summary, the expectation is for upside continuation to some degree but bulls need to adapt for a variety of possible outcomes following a pennant breakout.
Bull Flag vs Bull Pennant - Know the Difference
New traders often confuse the bull pennant and the bull flag. At a glance, both show contracting consolidation within uptrends. But there are subtle differences between bull pennant vs bull flag worth noting.
Bullish flags appear as brief rectangular pullbacks against the trend as the price moves sideways in a channel after a sharp rise before breaking upwards again. The key trait is the rectangular, fluttering shape - like a flag on a pole.
In contrast, the bullish flag pennant form slightly angled patterns as uptrend resistance and support converge. Their structure appears more triangular like the symmetrical triangles while bearish flags are straight channel ranges.
Also, the bullish and bearish pennant generally take a bit longer to play out.
How to Trade a Bullish Pennant Pattern
Now that we understand this pattern, let’s outline a trading approach to capitalize on bull pennants in real market conditions. We’ll walk through actionable steps - from identifying ascending pennant patterns to managing risk and maximizing potential profit.
Here are the key components of a bull pennant strategy:
- Enter on Validation - Wait for a clear break above resistance with expanding volume to confirm upside conviction before buying in and don't chase right away.
- Initial Stop Loss - Place protective stops below recent swing lows right under pennant support and move to breakeven once price hits targets.
- Profit Targets - Aim to take partial profits near the height of the pre-pennant pole. Trail further upside runners with a trailing stop.
- Pattern Failures - If prices break support levels, close out trades quickly and minimize losses.
The exact mechanisms of entries, stop placement, targets, and exits can evolve with experience trading flags and pennants but this basic framework serves as a template for building your own bull pennant process.
Now that you understand bull pennants better, you may be ready to start trading live markets and profiting from these patterns. If you need a forex and CFD broker to connect your analysis to real trades, check out Pepperstone or eToro if you’re a US resident.
