How to Identify and Trade the Pennant Chart Pattern
Pennant chart patterns are powerful.
A pennant offers us the perfect trade; easy to identify and explosive moves.The key to the trade, is the entry.
Patience is needed for the correct entry. The increase in automated trading creates many false breakouts. The best entry trigger is when the stock “tips its hand” with a fuel candlestick. This is a large green or red candlestick with volume.
A conservative entry is to wait for the first pause after the breakout.
The pennant chart pattern is a build-up of indecision, after a period of volatility. Wide swings in price action develop into lower-highs and higher-lows leading to a point of consolidation.
It’s during this point of consolidation that patience is required for a smart trade.
This chart shows a pennant chart pattern on a weekly time frame.
The weekly chart of UTX shows us expansion that leads to lower-highs and higher-lows. One thing to notice and remember, chart patterns show us an image of buying and selling pressure. They give us clues they do not give a forecast.
This pennant pattern is obvious but not perfect. Always think “What is this telling me about price action?”
A great trading quote I heard from Larry Williams a long time ago is: “Volatility leads to consolidation, consolidation leads to volatility, and so on. This structure sets up perfectly in a pennant pattern. (A fun trivia note, his daughter is Michelle Williams the actress)
Larry believes this is a core lesson in price action. I tend to agree with him.Traders need to identify profit potential for each idea. We tend to get chopped up in periods of consolidation. This knowledge helps reduce trades with low potential.
If you identify the cycle, you will avoid consolidations and wait for volatility. Sounds simple but we tend to complicate things for no reason. Larry teaches some great stuff. It’s not easy though. Requires some thought. Like running on the beach, it takes extra effort but it’s worth it.
Pennant Chart Patterns in Multiple Time Frames
A benefit of this pattern is its usefulness. It can be applied across multiple charts. A general rule is, ” The higher the time frame, the more explosive the result.” The magnitude of the breakout, should be analyzed in the context of the time frame of the pennant. Using technical analysis, you can set targets on higher time frames
Below we can see two pennant patterns that lead to an expansion in volatility. The size of the move is relative to the time frame.
Pennant Chart Pattern: Daily Time frame
Pennant Chart Pattern: 15 Minute Chart
Scanning for Pennant Patterns
I have to be honest. This chart pattern can be hard to find. Sometimes you scan hundreds of charts and not find one.
That’s OK. Great trades take time to develop. This chart pattern should be a part of your game plan research. It’s easy to spot and offers a good risk/reward ratio. He breakout works or it doesn’t.
Trade management is easy. If there is an existing trend prior to the pennant the breakout will likely be in that direction. Be a smart trader though, don’t jump-the-gun on the breakout. Wait for a large candlestick before you buy or short-sell.