Trading bearish and bullish pennants can provide you with yet another way to earn some extra profits on your trades. You don’t want to rely too much on any one signal or indicator, and that is why you should also check out the chart patterns that often form throughout the course of the trading day. You may discover that there are more ways to find tradable patterns than you had ever imagined.
Pennants are chart patterns that ought to be looked at as a continuation chart pattern. That is to say that you should see a pennant as an indication that the pattern that you have already seen forming is likely to continue to do so. That is not a guarantee that this will be the case, but you should take it as a sign that a continuation may be about to happen.
Ultimately, pennant formations occur after a big move — either upward or downward — after which buyers and sellers alike take a moment to catch up, thus resulting in consolidation. The consolidation manifests as a small triangle — called a pennant.
A bullish pennant is what forms when you see the price rise all the way to the point where it hits some resistance. After it smacks into the resistance, it comes back down slightly for a period of time. After that, it pulls up a little, down a little, and then — we hope — surges on to new highs. The period of time when it is bouncing back and forth in a tightening range is when it is forming the pennant that you are looking for. When you see that pennant form, you may decide to jump in on the trade.
Pennants are an indication that sometime major is happening, and you should assume that they are pointing to the possibility of a continuation in the pattern that has already been active.
You can see the same chart formation form in the opposite direction and take it as a sign that things will continue to be bearish. That is also an important indication to pick up on.
The pennant will be formed during a period of consolidation and then traders will look for price to continue downwards out of the bearish pennant.
You just want to make sure you are on the right side of which trend has begun to form. As long as you have positioned yourself in this way, you should be fine to handle whichever type of move is coming up next.