What it means
The pattern has two parts. First comes the flagpole, a steep and fast price move on strong trading volume.
After that, the price consolidates inside a narrowing range, with highs getting lower and lows getting higher, which forms the small triangular pennant. During the consolidation, trading volume usually dries up, showing that both buyers and sellers are waiting.
The pause is seen as a brief rest, not a change of mind. When the price eventually breaks out of the triangle, traders look for volume to pick up again as confirmation.
In a bullish pennant, the flagpole is a rise and the expected breakout is upward. In a bearish pennant, the flagpole is a fall and the expected breakout is downward.
In either case, the pattern is classed as a continuation pattern, meaning it suggests the earlier trend will carry on. Traders commonly estimate a price target by measuring the height of the flagpole and adding it to the breakout point for a bullish case, or subtracting it for a bearish one.
They also place a stop-loss order, an instruction to sell automatically if the price falls to a set level, just beyond the opposite side of the pennant. This limits losses if the pattern fails.
Pennants are similar to flags, which have parallel sloping boundaries instead of converging ones, and to symmetrical triangles, which develop over a longer time without a flagpole. A true pennant is normally short, lasting from about one to three weeks on a daily chart.
If it lasts much longer, it is more likely to be another pattern. It is important to be realistic about reliability.
Chart patterns are subjective, and the same chart can be read in different ways by different people. Many technical analysts treat a pennant as a hint to be combined with other evidence, and fundamental analysts often regard such patterns with scepticism.
In practice
Real-world examples.
Example
A shipping company's shares jump 25% on news of a large contract, then drift sideways in a tightening range for a week. A trader sees a bullish pennant and buys when the price moves above the upper line.
Example
A currency pair falls sharply after a surprise interest rate decision, then stalls in a narrowing triangle. A bearish pennant leads a trader to sell when the price drops below the lower line.
Example
A risk manager at a trading firm reviews the stop-loss orders in place on a position built from a pennant breakout. She confirms that the potential loss is within the desk's limit of 1% of capital.
Formula
Calculation
Flagpole height = Price at top of the flagpole - Price at start of the flagpole
Bullish price target = Breakout price + Flagpole height
Suppose a stock rises from $40 to $60 in two weeks, so the flagpole height is 60 - 40 = $20. It then trades in a narrowing range between $56 and $60 for ten days, and breaks above the top of the pennant at $59 on rising volume. Target = 59 + 20 = $79. A trader buying at $59 might place a stop-loss at $55, risking 59 - 55 = $4 per share to chase a potential gain of 79 - 59 = $20, which is a reward-to-risk ratio of 20 / 4 = 5 to 1.Case study
Seen in the real world.
Fenwick Trading Desk is an illustrative, fictional proprietary trading team that sets a limit of risking no more than $5,000 on a single idea. One of its traders spotted a pennant on a retailer's share price after a rise from $30 to $42, a flagpole of $12.
The price broke out of the pennant at $41. The trader bought 1,250 shares with a stop-loss at $37, a risk of $4 per share, which is 1,250 x 4 = $5,000, and set a target of 41 + 12 = $53.
The stock rose to $50 and then reversed, hitting a trailing stop at $47, giving a profit of 1,250 x 6 = $7,500. The illustrative lesson is that the pennant is a plan for entry, exit and risk, not a prediction, and the target was never reached.
Watch out
Common mistakes.
- Acting on a pennant without waiting for a confirmed breakout, which risks trading a false signal.
- Skipping the stop-loss, when patterns often fail and losses can grow quickly.
- Confusing a pennant with a longer triangle or a flag, which behave differently and last for different periods.
Questions
People also ask.
What is the difference between a pennant and a flag?
A pennant has converging boundaries that form a small triangle, whereas a flag has parallel boundaries that slope slightly against the trend.
How long does a pennant last?
Typically one to three weeks on a daily chart, though the time depends on the chart interval.
How reliable is a pennant?
Not guaranteed. Success rates vary, so traders combine it with volume, wider trends and risk controls.
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