Pennant Pattern: Complete Trading Guide

The pennant pattern is a powerful short-term continuation pattern that forms after a strong price movement. Resembling a small symmetrical triangle or pennant flag, this pattern indicates a brief pause before the trend continues. Pennants are among the most reliable patterns for traders looking to capitalize on momentum moves.

What is a Pennant Pattern?

A pennant is a continuation pattern consisting of two components: a strong directional move (the flagpole) followed by a brief consolidation (the pennant itself). The consolidation takes the shape of a small symmetrical triangle with converging trendlines that meet at a point.

Anatomy of the Pennant Pattern

Understanding each component is essential for proper identification:

The Flagpole

The initial strong move that precedes the pennant:

• A sharp, nearly vertical price move
• Occurs on significantly above-average volume
• Can be either up (bullish) or down (bearish)
• Creates the height used for price targets

The Pennant Formation

The consolidation period that follows the flagpole:

• Converging trendlines forming a small triangle
• Volume decreases significantly during formation
• Typically lasts one to three weeks
• Price makes lower highs and higher lows

The Breakout

The continuation move after the pennant completes:

• Price breaks in the direction of the original trend
• Volume increases substantially on the breakout
• Move size often equals the flagpole length

Bullish vs Bearish Pennants

Pennants can signal continuation in either direction:

Bullish Pennant

Forms during an uptrend, signals continuation higher:

• Flagpole moves sharply upward
• Pennant forms as a pause in the upward move
• Breakout occurs above the upper trendline
• Target is flagpole height added to breakout point

Bearish Pennant

Forms during a downtrend, signals continuation lower:

• Flagpole moves sharply downward
• Pennant forms as a pause in the downward move
• Breakdown occurs below the lower trendline
• Target is flagpole height subtracted from breakdown point

How to Trade Pennant Patterns

Follow this approach for trading pennants:

Pattern Identification

• Identify a strong, sharp price move (the flagpole)
• Watch for converging trendlines forming after the move
• Confirm volume decreases during consolidation
• Ensure the pennant is small relative to the flagpole

Entry Strategies

Several entry methods work with pennants:

• Breakout entry: Enter when price closes beyond the trendline
• Anticipation entry: Enter before breakout near the end of the pennant (riskier)
• Pullback entry: Wait for a brief retest of the broken trendline

Stop Loss Placement

Protect your position with proper stops:

• For bullish pennants: Stop below the lower trendline or the pennant low
• For bearish pennants: Stop above the upper trendline or the pennant high
• Risk should be 5-10% of your entry price maximum

Price Target Calculation

Use the flagpole height for targets:

• Measure the length of the flagpole
• For bullish: Add this length to the breakout point
• For bearish: Subtract this length from the breakdown point

Volume Confirmation

Volume is critical for validating pennant patterns:

• Flagpole: Must form on very high volume
• Pennant formation: Volume should contract significantly
• Breakout: Volume should surge above the pennant average
• Volume contraction during the pennant shows selling pressure easing

Pennant vs Flag Pattern

These patterns are similar but have key differences:

• Pennant: Consolidation has converging trendlines (triangle shape)
• Flag: Consolidation has parallel trendlines (rectangle shape)
• Both have the same entry, stop, and target strategies
• Both are short-term continuation patterns
• Both require a strong flagpole move

Pennant vs Symmetrical Triangle

While similar in shape, these patterns differ:

• Pennant: Forms quickly (1-3 weeks), requires a flagpole
• Symmetrical triangle: Forms over longer periods (months), no flagpole required
• Context: Pennants form mid-trend; triangles can form anywhere
• Reliability: Pennants are more directionally biased

Common Mistakes to Avoid

Watch for these errors when trading pennants:

• Missing the flagpole: Without a strong preceding move, it is not a valid pennant
• Pattern too large: Pennants should be small relative to the flagpole
• Taking too long: If consolidation exceeds 3-4 weeks, it may be a different pattern
• Ignoring volume: Volume should contract during formation and expand on breakout
• Wrong direction trades: Pennants continue the prior trend, not reverse it

Optimal Trading Conditions

Pennants work best when:

• Overall market trend aligns with the pattern direction
• The flagpole formed on exceptional volume
• The stock has high average daily volume for liquidity
• The consolidation is brief and tight
• There is a clear catalyst for the initial move

Time Frame Considerations

Pennants appear on multiple time frames:

• Intraday: For day traders; smaller moves but more opportunities
• Daily: Most common; one to three week formations
• Weekly: Less common; larger moves but rarer setups

Summary

The pennant pattern is a reliable short-term continuation pattern that offers excellent risk-to-reward opportunities. Key elements include a strong flagpole, converging trendlines during consolidation, and volume confirmation. With proper identification and risk management, pennants can be a valuable addition to your trading strategy.

Want to learn about similar patterns? Check out our guides on the symmetrical triangle and the rectangle pattern.