Pennants and flags
Both pennants and flags are short term continuation patterns. They mark a small consolidation before the trend continues. They can be bullish or bearish in nature depending on the trend’s initial direction.
Pennants
Pennants usually form after a significant spike up or down in price. Pennants create a triangular shape that converges as the pattern matures. Similar to the triangle patterns in the previous lesson, but much shorter in nature, pennants will break through resistance or support to confirm the continuation of a trend.
Flags
Flags are identical to pennants with the exception of the support and resistance levels being broadly parallel.
Trading pennants and flags
Before trading, traders wait for the pattern to confirm. For a bullish pennant or flag, this comes from a confirmed breakout above support, for the bearish pattern a break below support. When traded take profits and stop losses can be set as follows:
- Price target: the price target is set by projecting the flagpole up from the breakout. The flagpole is the height of the short, sharp move up preceding the pattern.
- The stop is set above the pattern’s resistance if bearish or below the support line if bullish. If breached this would invalidate the continuation potential of the pattern.
In EURUSD we can see a bullish flag develop, note it only lasted about 15 periods. However, this trade does not appear to have been a profitable one but the set up looked promising. The stop loss would have done its job.
- Pennants and flags are short term continuation patterns.
- Pennants and flags can be both bullish or bearish in nature.
- These patterns usually appear after a significant spike up or down in price, the price consolidates and breaks out in the direction of the trend.
- Traders use the flag pole to project a take profit level and set the stop below support on bullish patterns, above resistance on bearish ones.
