HOW TO TRADE BULLISH PENNANT CHART PATTERN

How to trade bullish pennant chart pattern
Infographic - How to trade bullish pennant chart pattern

Entry: after breaking the pennant's upper border at point (4)

Take profit: identified by measuring the pennant's pole height, which is the vertical distance between points (1) and (2), that measurement is then applied from the breakout rate (4)

Stop loss: the pennant's lowest low (3)

BULLISH PENNANT PRICE ACTION

This chart pattern starts forming with bulls already in control of the exchange rate's sharp uptrend. When bears enter the market, trading is contained briefly in a -mini- symmetrical triangle shape. Bulls then break that triangle's upper resistance, and the exchange rate continues its uptrend.

Let's break down the pattern formation!

A sharp upwards price action is initiated from (1) till it finds the first resistance (2), creating the pennant's pole.

Price action reverses direction from the first resistance (2) and goes downwards till it finds the first support (3)

Price action bounces in (2-3) range, creating lower high(s) and higher low(s).

The pattern is completed when price action reverses direction from the last touch to the pennant's lower border and goes upwards till it breaks the pennant's upper border at point (4)

NOTES ON BULLISH PENNANT

Direction

Continuation

Type

Bullish

Occurrence

High

Common term

Short-Medium

Before the breakout, at least two highs (including the pennant's pole high) and two lows are the minimum for a valid pattern, more touches are acceptable.

The pennant's pole is a sharp upwards price action.

Volume is usually high at the pennant's pole, as well as when breaking the pennant's upper border.

This pattern is commonly found on short-term and medium-term time frames.

BULLISH PENNANT REWARD:RISK

This pattern is known for its high R:R.

R:R depends on the lowest low to breakout distance (3-4), compared to the pennant's pole height (1-2)

Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to that rate.

BULLISH PENNANT REAL TRADE

Bullish pennant real trading example
Forex chart - Bullish pennant real trading example, as found on the H4 chart of AUD/USD using XM's MT4 platform

PRE-BREAKOUT CALCULATIONS

Since a bullish pennant chart pattern can be spotted after the reversal from point (3), you can save yourself precious time by doing the following set of calculations before the breakout, since they don't rely on the trade's entry rate.

  • Pattern length (point (2) rate - point (1) rate)
    • (0.76936 - 0.75008) * 10000 = 192.8 pips
  • Stop loss rate (point (3) rate - 10% of pattern length)
    • 0.76370 - ((10 * 192.8 / 100) / 10000) = 0.76177

POST-BREAKOUT CALCULATIONS

Take profit calculation depends on the pennant's upper border breakout rate, which is the variable point (4). It is highly recommended to calculate it as soon as a breakout occurs, so you can focus more on the calculations needed for the actual trade.

  • Take profit rate (breakout rate + pattern length)
    • 0.76714 + (192.8 / 10000) = 0.78642

TRADE SETUP

Choosing when to enter the trade after the pennant's upper border breakout is always left to your best judgement. In this trade, we chose to enter the market at the closing rate of the candle right after the candle that broke the upper border, which was a strong bullish candle that closed on a higher rate than that of the pole's high at point (2). The breakout candle itself was a strong bullish candle as well and could have made a good entry point, we just preferred to have more confirmation by breaking the pole's resistance.

  • Trade entry rate
    • At the closing rate of the candle right after the candle that broke the upper border at point (4): 0.77025
  • Take profit in pips (take profit rate - entry rate)
    • (0.78642 - 0.77025) * 10000 = 161.7 pips
  • Stop loss in pips (entry rate - stop loss rate)
    • (0.77025 - 0.76177) * 10000 = 84.8 pips
  • Stop loss R:R (take profit in pips / stop loss in pips)
    • 161.7 / 84.8 = 1.907

Currency pair

AUD/USD

Timeframe

H4

Breakout

21-Dec-2017

Platform

MT4

Broker

XM