In this pennant & flag pattern guide, you will learn:
Chapter 1:
Introduction to Price Chart Patterns
Before diving into the flag & pennant patterns, we recommend you to first read “The Definitive Guide to Trading Price Chart Patterns” to get the big picture and learn about the different types of price chart patterns.
Once you are done with that, you can return to this guide, which will focus on the flag & pennant patterns in greater detail.
Chapter 2:
What is a Bull Flag & Bear Flag?
After having seen all the different price patterns, in this chapter we will zoom in on the flag pattern, which is one of the continuation patterns.
The bullish version is called the bull flag, while the bearish version is called the bear flag.
We will learn how the pattern forms, how to identify it, and the best way to trade it.
A triangle pattern, as its name suggests, is a triangular consolidation range in which prices moves about.
The triangle pattern generally represents a medium-term consolidation of prices, and is usually found in the mid/late stages of a trend.
Since it is a medium-term pattern, the triangle pattern usually consists of 50-100 bars, and most of the time results in prices breaking out in either direction as prices get compressed.
As prices get squeezed towards the tip of the triangle, prices will be forced to break out of the pattern, and the direction is takes will depend on the type of triangle.
There are 3 main varieties of triangles – namely the ascending triangle, the descending triangle, and the symmetrical triangle, and we will be going through each one in more detail later on.
Chapter 3:
What is a Bullish Pennant & Bearish Pennant?
Very similar to the flag pattern, in this chapter we will zoom in on the pennant pattern, which is one of the continuation patterns.
The bullish version is called the bullish pennant, while the bearish version is called the bearish pennant.
We will learn how the pattern forms, how to identify it, and the best way to trade it.
A triangle pattern, as its name suggests, is a triangular consolidation range in which prices moves about.
The triangle pattern generally represents a medium-term consolidation of prices, and is usually found in the mid/late stages of a trend.
Since it is a medium-term pattern, the triangle pattern usually consists of 50-100 bars, and most of the time results in prices breaking out in either direction as prices get compressed.
As prices get squeezed towards the tip of the triangle, prices will be forced to break out of the pattern, and the direction is takes will depend on the type of triangle.
There are 3 main varieties of triangles – namely the ascending triangle, the descending triangle, and the symmetrical triangle, and we will be going through each one in more detail later on.
Chapter 4:
Pennant & Flag Pattern Psychology
This chapter will look at the underlying reasons why triangle patterns form, and how the actions of different market players give rise to such patterns.
Buying and selling forces are always fighting to gain control, and depending on which side is stronger, it gives rise to different types of triangle patterns.
Now, let’s take a look under the hood!
In the triangle pattern, bulls (buyers) & bears (sellers) are fighting and both sides are trying to gain control. Bulls want higher highs and higher lows, while bears want lower highs and lower lows.
As the fight intensifies, uncertainty increases and volume decreases, as the range of prices start narrowing, so both bulls and bears choose to wait on the sidelines until the direction becomes clear before jumping in again.
That is why once a breakout occurs, price and volume tends to spike, as all the buyers or sellers waiting on the sidelines start making their move.
Chapter 5:
Pennant & Flag Pattern Trading Strategies
In this chapter, we will discuss the best ways to trade the triangle chart pattern, and how to profit from this pattern.
There are 2 main strategies we will be using:
Each has its pros and cons for practical trading.
There are 2 main strategies, which focus on the directional triangles (ascending triangle and descending triangle), and the difference lies in how early to enter the breakout when it happens.
Something to take note of, breakouts usually occur when prices are around 2/3 to 3/4 of the pattern length, and if prices go past the 3/4 mark, there is a possibility that prices may just continue to meander sideways without breaking out. This would mean a failed pattern.
Now, let’s go through each strategy in greater detail.
Chapter 5a:
Strategy #1 Pre-Breakout Entry
The first trading strategy for the triangle pattern is the breakout entry, which allows us to enter the trade immediately once the pattern is completed and the breakout occurs.
This works best on the ascending triangle (long entry) and descending triangle (short entry).
Triangle Pattern Trading Strategy #1
Our first strategy for the triangle price pattern is to enter on the breakout of an ascending triangle or descending triangle pattern.
As mentioned previously, a triangle is a compression of prices while buyers and sellers wait on the sidelines for a breakout. For this setup, we will be looking to enter just as the breakout happens.
In the example above, we see a prior uptrend, so we know the odds for an upside breakout are higher.
As the ascending triangle forms, we see a series of higher lows (and similar highs) forming, showing a gradual build-up of bullish pressure. We also see prices pushing against the resistance level formed by the similar highs.
Finally, the resistance gives way, and prices through.
For trading, we would look to enter near the point of breakout, keeping an eye for strong price action and volume to support the breakout. We can also use the breakout bar(s) to place a stoploss.
Note that this strategy works just as well with a descending triangle, you’ll just have to flip the pattern around for a downside breakout.
This strategy works best if the prior trend (before forming the triangle pattern) is strong, and has a higher chance of success if the triangle is smaller, in terms of height and duration.
Chapter 5b:
Strategy #2 Breakout Entry
The second trading strategy for the triangle pattern is the pullback entry, which allows us to enter on pullbacks after a breakout occurs. This is useful if the initial breakout is weak, or if you missed the breakout trade.
This works best on the ascending triangle (long entry) and descending triangle (short entry).
Triangle Pattern Trading Strategy #2
Our next strategy for the triangle price pattern is to enter on a pullback after the initial breakout.
As covered in the previous setup, one of the ways to trade an ascending triangle or descending triangle is to enter the moment price breaks out of pattern.
However, sometimes the odds of a successful breakout might be lower, for example if the triangle pattern is large (more uncertainty), or the pattern goes against the prior trend (bullish ascending triangle in a downtrend, or bearish descending triangle in an uptrend).
In the example above, we see a prior uptrend, followed by a bearish descending triangle. This sets up up a little contradiction, which suggests that the breakout might not be as strong or as clear-cut.
Therefore, when the breakout happens, instead of entering the trade immediately, we wait to see if there is a pullback to test the support-turned-resistance level (which was the flat line of the descending triangle).
For trading, we would look to enter once the pullback is completed, and prices start to head back down. The end of the pullback would also be a good place to put your stoploss.
Note that this strategy works just as well with an ascending triangle, you’ll just have to flip the pattern around for an upside breakout.
Chapter 6:
Profit Target for Pennant & Flag Pattern
One major benefit of using price patterns is that they provide a measuring objective (price projection), which is useful for getting an estimated price target for your trades.
In this chapter, we will show you how to project a price target using the triangle price pattern.
Once a triangle pattern is completed, one of the most useful things about it is its ability to provide a price projection, which can be used to estimate a minimum profit target for your trade.
This can be done by taking the maximum height of the triangle, and projecting that distance from the breakout point.
In the chart above, the maximum height of the triangle is indicated by the blue rectangular box, which is then used as a price projection at the breakout point.
The black horizontal arrow indicates the price level which serves as the minimum profit target for the triangle pattern breakout.
This price projection technique can be used in conjunction with other methods, such as support and resistance levels, and if there is any confluence, gives an added layer of confirmation.
Chapter 7:
Tips from the Trading Desk
When it comes to actual trading, the context is usually more important than the price pattern itself, and the more factors you can align in your favour, the higher your chances of success in using the triangle pattern to trade.
In this chapter, we will share practical trading tips that you can to enhance the success rate of the triangle chart pattern.
As you can see from the chart above, this is an example of trend trading using the triangle pattern, because the triangle formed is actually a consolidation pattern within the major trend, so this whole triangle is actually a pullback opportunity to enter the underlying trend.
Although we generally do not like trading symmetrical triangles, the odds in this case are better than 50-50 because there us a higher chance of an upside breakout due to the context (triangle pattern pullback in major uptrend).
Besides strong trends, triangle patterns can also form near the edges of support or resistance levels, when prices are trying to push through that price level, so you might see them near the necklines of other patterns, such as the double top/bottom, or head and shoulders pattern.
In a sense, the triangle pattern becomes part of these larger patterns depending on the context.
Chapter 8:
Video Tutorial on Pennant & Flag Patterns
Coming soon!
Conclusion
I hope you have enjoyed this guide on how to tackle pennant & flag chart patterns.
Now I’ll like to hear from you: what is your key take-away from this trading guide?
Which of the 4 patterns are easiest to spot – bull flag, bear flag, bullish pennant, or bearish pennant?
What is your favourite pennant & flag pattern strategy for trading?
Do you have any pennant & flag pattern trading strategies of your own to share?
Let me know by leaving a quick comment below right now.
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