In forex markets, pennants belong, together with rectangles, to the so-called ‘continuation chart patterns’, those who are formed after strong market moves. They are observable after a long upward or downward trend, when buyers or sellers take a break before taking the pair further in the same direction.
Graphically, the pair consolidates and forms a tiny symmetrical triangle, the ‘pennant’. While the price is still consolidating, more buyers or sellers enter the market on the strong move, forcing the price to bust out of the pennant formation.
There are two types of pennants: bearish and bullish.
The bearish one is formed during a steep, almost vertical, downtrend. After that sharp drop in price, sellers close their positions while others decide to join the trend, making the price consolidate. As soon as enough sellers enter the market, the price breaks below the bottom of the pennant and continues to decline.
For instance, in a bearish pennant breakdown, the decrease resumed after the price made a breakout to the bottom. To make the most from it, a trader enters a short order at the bottom of the pennant with a stop loss above it. That way, he can easily exit the market right away in case the breakdown was a fake out. Unlike the other chart patterns wherein the size of the next move is approximately the height of the formation, pennants signal much stronger moves. Usually, the height of the earlier move (also known as the mast) is used to estimate the size of the breakout.
A bullish pennant, instead, signals that an upward trend is ready to restart, or that the sharp increase in price would resume after the consolidation, when buyers are ready to take the price higher again.
For example, in a bullish pennant breakout, the price makes a strong move upwards after the breakout. To make the most of it, a trader enters a long order above the pennant and a stop below the bottom to avoid fakeouts. The size of the breakout move is around the height of the mast (or the size of the earlier move).