You know, I've long noticed that the pennant pattern is one of those formations that really work if you catch them correctly. It's a continuation pattern that forms quite quickly, usually within a couple of weeks, at most three. And the main thing is — it appears roughly in the middle of the move, when the market has already gained momentum and then slows down a bit.

The pennant forms as follows: first, there's a sharp and steep move, which is the flagpole. Then the price begins to trade within a narrow range, taking the shape of a small symmetrical triangle. The upper and lower trendlines converge at a point. It looks like a small flag on a pole — hence the name. The pennant pattern appears in both bullish and bearish markets, but it’s best seen on short-term timeframes.

What attracts me to this is the clear entry signal. When the price breaks the pennant boundary in the direction of the previous trend, it usually indicates a continuation. But volume is a key factor here: during the formation of the pennant, volume decreases, and upon breakout, it sharply increases. If there’s no volume — that’s already suspicious.

Trading pennants requires proper target calculation. Take the distance of the flagpole and project it from the breakout level. For example, if the flagpole dropped by 80 cents, and the breakout occurred at $5.98, then the target will be at $5.18. Place your stop order slightly above the resistance line for a bearish pennant or below the support for a bullish one.

Now about reliability. John Murphy, in his classic book, calls the pennant one of the most reliable patterns. But Thomas Bulkowski conducted a study of over 1,600 patterns and found that things aren’t so straightforward. He discovered a 54% failure rate for breakouts in both directions, and the success probability was only 35% for upward moves and 32% for downward. The average move after the trigger was about 6.5%. This reminds us why risk management is so critical in trading.

The difference between a pennant and other formations is that a wedge can be both a continuation or a reversal, while a pennant is always a continuation. A symmetrical triangle looks similar to a pennant but requires a stronger prior trend. And a flag differs in its consolidation shape after the flagpole.

A bullish pennant occurs when an uptrend pauses in a small triangle before continuing upward. A bearish one is the opposite — a downtrend pauses in a pennant shape before further decline. The trading logic is the same, just the directions are opposite: long for bullish, short for bearish.

The main thing I’ve learned over years of trading is that the quality of the previous trend determines the strength of the breakout. If there was an aggressive move with good volume before the pennant, you can expect a powerful continuation after the breakout. If the trend was weak, then the pennant will be weak too. That’s why many traders combine pennants with other technical analysis tools to increase the probability of success. Remember, three weeks is the maximum formation time. If it takes longer — it’s no longer a pennant, but something else.