I've noticed that many traders underestimate the pennant pattern in trading as a tool for entering a position. I used to be skeptical of this pattern myself until I started analyzing it more carefully.

Essentially, a pennant is a consolidation pattern that appears roughly in the middle of an emerging trend. It forms quite quickly, usually within a couple of weeks at most three. Before the consolidation, there is a sharp and steep move — the flagpole. Then the price begins to trade within a narrow range, taking the shape of a small triangle. The upper and lower trendlines converge at a point.

What’s interesting is that the pennant pattern in trading appears on both rising and falling markets. A bullish pennant indicates continuation of the uptrend after consolidation, while a bearish one signals continuation of the downtrend. The pattern looks the same, only the breakout direction differs.

In practice, you should enter exactly on the breakout of the pennant boundary in the direction of the trend. There are several options: you can enter immediately on the breakout, wait for a pullback and continuation, or enter at the pennant’s maximum/minimum. The main thing is that volume should sharply increase during the breakout, confirming the strength of the move.

Calculating the target level is simple. Take the height of the flagpole (the distance from the start of the sharp move to the entry point into consolidation), and project this same distance from the breakout level. For example, if the flagpole dropped by 80 cents and the breakout occurred at $5.98, then the target will be $5.18.

Place your stop-loss slightly above or below the trendline depending on the direction. For a bullish pennant — below support, for a bearish — above resistance.

The reliability of the pattern is where things get interesting. John Murphy, in his classic work, considers the pennant one of the most reliable continuation patterns. But research by Thomas Bulkovski showed a less optimistic picture. He tested over 1,600 patterns and found that the failure rate of breakouts is about 54% in both directions. The success probability is approximately 35% for upward moves and 32% for downward moves. The average move after the trigger fires is about 6.5%.

It doesn’t sound very convincing, but that doesn’t mean the pennant pattern in trading is useless. It’s just important to understand that any pattern requires additional confirmation. I usually combine the pennant with other technical analysis methods — support/resistance levels, volume, indicators.

Another important point is to distinguish the pennant from similar patterns. A flag looks like a pennant, but the consolidation there has a rectangular shape, not a triangle. A symmetrical triangle can be both a continuation and a reversal pattern, while a pennant is only a continuation. A wedge doesn’t require a preceding flagpole.

Honestly, the main factor in trading a pennant is the quality of the trend that precedes it. The more aggressive the move before consolidation, the more powerful the breakout will be. If the flagpole is weak, there’s not much to expect from the pennant.

In general, the pennant pattern in trading is a useful tool, but not a magic wand. Use it as part of your system, manage your risks, and don’t forget about stop-losses. Results can improve if you analyze not only short-term movements but also look at the bigger picture.