Pennant is one of those patterns that I often see in my chart analysis, and it truly deserves attention. It is a consolidation figure that indicates trend continuation but forms much faster than many other patterns. Usually, a pennant appears roughly in the middle of an emerging trend, making it a good signal to enter in the direction of the main movement.

For a proper pennant, preliminary preparation is needed — a sharp and steep rally in a bullish market or a sharp decline in a bearish one. You see, without this aggressive flagpole, you won't get the classic pattern. After this sharp move, the price enters a consolidation phase, forming a small symmetrical triangle. The upper trend line points downward, the lower one upward, and they converge at a point. That is the pennant.

How to trade this figure? There are several approaches. You can enter at the breakout of the boundary in the trend direction. Or wait until the price breaks the maximum or minimum of the pattern itself. There is also a third option — enter on a pullback after the initial breakout and wait for continuation. Measuring the target level is quite simple: take the distance from the start of the flagpole to the top or bottom of the pennant, then project this same distance from the breakout point.

Here's what's interesting — pennants are often compared to flags and symmetrical triangles. They differ from flags in their consolidation shape. From triangles — in size (the pennant is smaller) and the mandatory sharp trend before it. They differ from wedges in that wedges can be reversal patterns, while pennants are only continuation.

But honestly? The reliability of this pattern is not as high as many think. John Murphy, in his classic book, calls it one of the most reliable continuation patterns. However, studies show a different picture. Thomas Bulkovski tested over 1,600 pennant samples and found that the failure rate of breakouts is about 54% for both upward and downward movements. The success probability was 35% for upward moves and 32% for downward moves, with an average movement of about 6.5%.

This means that a pennant is not a magic wand. It is simply a tool that should be used in conjunction with other analysis. It’s important to remember that a proper pennant forms within a maximum of three weeks; otherwise, it can turn into a larger pattern or simply fall apart. During formation, volume should decrease, and at the breakout — sharply increase.

The key point is the quality of the preceding trend. If the trend was aggressive and steep, the breakout of the pennant will be stronger. That’s why active risk management is not just advice but a necessity. Always place a stop order above the resistance trend line for bearish pennants or below the support line for bullish ones. This will save your account when the pattern fails, which happens often.