Classic Chart Patterns- Pennant Formation

A pennant formation is a very short term continuation pattern that lasts anywhere from 1 to 3 weeks in duration, this formation is the result of strong rally. Most trades have probably seen this formation a lot of times, but have never really considered about how to capitalize on it. Pennant patterns usually take place in the middle of larger move that reaches higher prices for the security.

What it looks like?
A pennant formation consists of a long pole represented by a large spike in price followed by a symmetrical triangle coming off it which represents profit taking, followed by reduction in the security price on reduced volume. The symmetrical triangle is formed by the price narrowing – lower highs and higher lows. When the price has nowhere to go, it breaks out in the direction of the overall trend At that point the security will move upwards with tremendous increase in volume sending the price to new highs. This pattern is quite reliable, but will not work a 100% of the time – no pattern does.

How to use the Pennant?
Plan your entry and exit levels well in advance, if you suspect that a pennant formation is coming your way. You can even figure out roughly when the breakout is most likely to take place. Another great aspect of the pennant is being able to forecast how high or low the price will move on breakout. To do this simple measure the pole of the pennant and take that height and apply it to the point of breakout.

Things to keep in mind
A pennant takes 1 to 3 weeks to form. If it is any shorter or longer it isn’t as reliable. Also keep in mind that volume should be decreasing as the pennant forms.

Pennants are not only reliable, but also very profitable as the pole of the pennant is usually quite large indicating the the price move is only half complete. They are great patterns for traders to trade.


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