I've noticed that many traders overlook one of the most powerful chart patterns — the pennant is actually a figure that works. And not just works, but works quite consistently if you know what to look for.

A pennant is essentially a continuation pattern that appears in both rising and falling markets. It forms after a sharp price movement up or down, when the quotes start trading within a narrowing range, taking the shape of a small symmetrical triangle. This usually happens around the midpoint of the move, signaling the start of the second half of the trend.

What's interesting — a pennant is a pattern found on all timeframes, but most often seen on short-term charts. It’s easy to confuse it with a flag because both patterns have a sharp rise (pole) before a consolidation phase. The difference in the shape of the consolidation — in a pennant, it’s a triangle.

For proper formation, a sharp and steep rise (in a bullish market) or a sharp fall (in a bearish market) is needed. There should be visible aggressive buying or selling with good volume before the pattern itself begins to form. This is critical.

The breakout usually occurs in the direction of the initial trend. The more aggressive the movement before the pennant formation, the stronger the breakout afterward. A pennant is a pattern that should form within a maximum of a couple of weeks — three weeks. If it takes longer, it’s likely to turn into a larger pattern or fail.

During formation, volume should decrease, but once the breakout occurs, volume should spike sharply. This indicates that the enthusiasm of buyers or sellers has returned and the movement will be sustained.

Entry strategies can vary. You can enter on the initial breakout of the boundary in the direction of the trend. Or wait for a breakout of the pennant’s high or low. There’s also an option to enter on a pullback after the initial breakout and then continue the trend.

The target is simple — measure the distance from the start of the pole to the top or bottom point (depending on the direction) and project this distance from the breakout point. The stop order is placed slightly above the trendline for a bearish pennant or below for a bullish one.

Now about reliability. John Murphy, in his classic book on technical analysis, considers the pennant one of the most reliable continuation patterns. But research by Thomas N. Bulkowski showed a more complex picture. He tested over 1,600 samples and found that the failure rate of breakouts is about 54% for both upward and downward movements. The success probability was approximately 35% for upward moves and 32% for downward moves, with an average move of about 6.5% of the initial movement.

This confirms why risk management is so critical. Patterns often fail, and you need to be prepared for that. It’s important to note that Bulkowski’s results might be somewhat conservative because he only looked at short-term fluctuations, not the full move to the possible maximum or minimum.

A bullish pennant is an upward trend pattern that starts with a steep rise, followed by a short consolidation before continuing upward. A bearish pennant is its mirror image — a sharp decline, consolidation, and then a continuation downward. The approach to trading is the same for both — only the direction changes.

A key point: the quality of the trend before the pennant formation determines the strength of the breakout. If the movement was aggressive and sharp, then after the breakout, the movement will be powerful. That’s what you should pay attention to. Many traders use pennants together with other technical analysis methods to improve entry accuracy and position management.

A pennant is a pattern that requires attention to detail, but if traded correctly, it can be part of a stable strategy.