Pennants are continuation forex patterns that can be often times mistaken for either triangle forex pattern or flag pattern. Unlike the triangle, pennants are relatively flat and they signalise that trend continuation is more likely. They share similar properties with flags therefore misidentification is not an issue.
About pennants forex pattern
Similar to flag forex patterns, pennant often times represent second and fourth of Elliot waves. Thus signalising ongoing correction and the fact that the volatility gets smaller with each swing. Price compressed in pennant is simply more likely to explode in the direction of previous trend. Therefore, we trade it as continuation pattern.
Trading pennant forex pattern
It is necessary to realise that compressed price between sloping trendlines, makes it harder to distinguish between fakeouts and breakouts. Fakeuts can be easily traded in the direction of main trend, with amazing risk reward ratio. More conservative traders will choose to wait for the valid (confirmed by volume) breakout in the direction of general trend.
Placing of stop loss may differ according to volatility of the market. In quiet market, stop loss can be placed at top of previous swing opposing the trend. In volatile market we should place stop loss at opposite range of pennant.
As with other forex chart pattern, size of the formation range should be also used as a default profit, increasing it in strong trend.
Pennant vs. triangle
Triangles are typically wider and they are present in the more volatile (ranging) market. Triangles alone, cannot provide continuation / reversal signal as the direction of market is not clear beforehand. Pennants are typically flatter and they are present in relatively stable trend, with lower volatility and narrower candles. They can be considered to be a pause in a trend, before its continuation.