When it comes to pennant chart patterns, I’ve been asked about them a lot lately, but I think this is a pattern many traders overlook. It often appears on short-term timeframes and serves as a trend continuation signal, but there are differing opinions about how reliable it is.

To explain the basics of a pennant chart pattern, this is a trend continuation pattern that occurs in both bullish and bearish markets. After a sudden price rise or fall, the price starts to move within a small range in the shape of a symmetrical triangle. That short consolidation phase forms after the sharp move often called the flagpole.

Key points in the formation are that you need active buying or selling with strong relative volume before the pennant, and breakouts usually occur in the direction of the prior trend before the formation. This is important because the strength of the trend before the formation provides a clue to the potential strength of the subsequent move.

The duration is typically about 2 to 3 weeks. If it continues longer, it may develop into a larger pattern like a symmetrical triangle, which can lead to failures. During the formation, volume tends to decrease, but at the breakout it should spike sharply. That sudden increase is an important signal that indicates a real breakout.

As for the reliability of pennant chart patterns, opinions are divided. John Murphy rates it as one of the most reliable trend continuation patterns, but tests by other researchers on over 1,600 pennants have produced different results. The failure rate comes out to 54% in both upward and downward directions, with success rates of 35% to 32%. The average move in the first move is about 6.5%.

What these data show is that relying solely on the pennant pattern can be risky. Many pro traders combine this pattern with other technical analysis to improve decision accuracy.

There are several approaches you can take when trading. One is to enter on the first breakout when the boundaries break out in the trend direction. Another is to wait for a breakout of the high or low. And there’s also a method to enter when the move continues after an initial pullback.

For setting measured targets, you create them by measuring the distance from the start of the flagpole to the apex or trough. Then you subtract that distance from the breakout price to calculate the target price. For loss management, the basic rule is to place stops below the support trendline for bullish pennants, and above the resistance trendline for bearish pennants.

The difference between bullish and bearish is only the direction of the trend they form, while the trading approach is the same. Bullish pennants are traded with a long bias, and bearish pennants are traded with a short bias.

In the end, the key to succeeding with pennant chart patterns lies in the quality of the preceding trend. If you see active and sharp movement before the formation, the breakout is more likely to continue afterward. That’s why you need to look for truly strong moves before consolidation happens. It’s the sharp, powerful market environment that makes this pattern more trustworthy.