# How to Trade Bearish and Bullish Pennants

Video Transcript:

Hello traders. Welcome to the third module of the advanced technical analysis course, chart patterns. In this lesson we are going to teach you how to trade the bullish and the bearish pennant.

Remember that the bullish and the bearish pennant are continuation patterns that are found in the middle of directional moves. They look like triangles, but they are much smaller and the consolidation area inside of them is much choppier. Let’s go through the lesson and see how we can profit from these continuation patterns.

Let’s start with the entries, the stop loss’s levels, the target levels, and how to trade these continuation patterns. It is quite simple to trade these continuation patterns, and actually it’s a lot like flags. The difference lies in the stop loss area and how to calculate the targets. Let’s go through the lesson.

Of course you need to wait for the breakout of the pennant for you to be able to trade it. Pennants are continuation patterns that are found in the middle of directional moves. They look like triangles, but they are smaller and the area of consolidation is choppier. The way to trade it is to wait for the breakout and trade in the direction of the move. Because they are continuation patterns, you will be looking to go long if you are in an up move and you find a pennant, or go short if you are in a down move and you find a pennant.

As we already told you, they look like triangles, but the price action inside of them can be very choppy. This is because after a directional move, traders will take small profits or take all of their positions out, which will make prices drop, and then traders will try to get in on the long position. Also, traders will try to push price down. That creates a consolidation period inside of this triangle-like formation. When it breaks out on the direction of the move you will be trading a long position in an up move on a pennant breakout.

Now for the stop losses. The stop losses should go below the pennant support of the previous low when in an up move, and in a down move, the stop loss should go below the pennant’s resistance or the previous high. Here’s an example. As you can see, we are in an up move, and we are trapped inside a pennant.

We already know that this is a continuation pattern, so we are looking for a breakout of this trend line. When we have the breakout of this trend line, we get a signal to go long, and our stop loss levels should go below the pennant’s support and below the previous low, because if price goes against us and breaks this ascending support and this low, it will mean that we are in a reversal and our long idea is no longer valid.

The targets are calculated like we calculate a flag breakout. When calculating a pennant target, you should measure the pull. The pull is the previous directional move before the consolidation period, and when you have the measurement in pips you should extrapolate it to the breakout zone. Here’s an example of how to calculate the target on a pennant breakout.

As you can see here, we are in an up move. Right before we got into this pennant, we calculate from below until the pennant’s start, and we extrapolate this measurement to the breakout zone, so we can get our target. When we do have the breakout, we have our stop loss levels and our target levels. If our stop loss levels get hit, it would mean that our trade idea was not valid, and if our targets get hit it would mean that we have made a good trade.

In either case the risk to reward ratio on a pennant is greater than one to two most of the time, so if you are looking to trade continuation patterns, you should be trading a very profitable strategy.

Let’s go through a trade analysis and see a live pennant in play. In this case we are going to go with the short position on a bearish pennant. You can see that here we are in a down move, and then we have a consolidation period. As you can see, it’s super choppy inside this pennant, but in any case we are making lower highs and higher lows, which means that we are inside of a pennant.

What we look for is a breakout to the downside, so we can go short and profit from the momentum of the breakout. You can see here that this candle gave us a fake out. This is why you need to have strong moves to the downside of strong breakouts for you to be able to profit from them, because if you trade false breakouts like this one, you will be trapped inside the range for a while, and you will be in a non directional trade, which will mean that your trade will not be making money and, most certainly, will be losing money.

The first thing we are going to do is calculate the targets of the pennant breakout. As we said before, we go for the high until the pennant starts. Here we have 100 pips. Then we extrapolate it from the breakout area, and we get our targets, which are 100 pips below the pennant. Then we just need to wait for the breakout, and in this case we have a very successful trade with a 2.2 to 1 risk to reward ratio.

As you can see, we have reversal patterns and we have continuation patterns. If you focus on trading these barters and actually being patient enough for them to complete and give you the signal to enter the market, you will be a profitable trader.