Hello there, this is tradingpedia.com and this video deals with two classic technical analysis patterns. Classic because they belong to the Western world part of technical analysis, developed on the stock market back in time and they work on any market or timeframe you want to use in trading.
We talk today about flags and pennants. These are continuation patterns, meaning that if you have a trend, sometimes in the middle of the trend you will have a continuation pattern. It means that the market consolidates for a while, builds energy before continuing in the same direction.
The consolidation area or the continuation pattern may be cause by various factors. For example, an interest rate announcement, or some key economic data like the Non-Farm Payrolls in the United States or the Unemployment Rate in the United Kingdom, and so on. Or, simply the market waits for more liquidity as there is a bank holiday in one of the important centers – it depends.
What Is a Pennant
A pennant looks like this. You have a bullish trend, and then the market, at one point in time, consolidates, forms a triangular pattern, but a triangle that does not take much time. Next, the trend resumes. A pennant is easily visible if you connect the edges of the triangle and it has a measured move equal with the distance from the start of the trend until the pennant.
This is the measured move, we copy and project it from the end of the triangular pattern. However, more important, in a pennant, the measured move must come in less than the time it took the consolidation to form. We simply measure the consolidation and project it on the right side of the chart and the measured move must come before the time expires.
If time expires, you book your profits. If you don’t get out, at least book half of the profits and move the stop at breakeven because the pennant was not confirmed by the future price action. A pennant is a very powerful formation in the sense that the consolidation takes a short time. It is not a long-term consolidation, so when it pops it should reach the measure move in a jiffy.
This is the GBPUSD daily chart and each candlestick represents one day. The market formed the pennant here and if we use the principles discussed so far, we mark the consolidation and the edges of the triangle, this is the pennant. Next, we find the measured move and project it from the end of the pennant and project the time element on the right side. The measured move should come in less than this time. Because it did, the entire pattern is valid. This is a continuation pattern and all the rules are respected.
What Are Bullish and Bearish Flags
Besides pennants, the market also forms bullish and bearish flags. In a bearish flag, a falling trend must exist and then the market consolidates. Careful here – a pennant consolidates on the horizontal, but a bullish flag may consolidate on the horizontal or against the main trend. So if this would be your trend, a bullish flag may also consolidate like that, in the opposite direction of the trend.
The difference between flags and pennants is that flags take much more time than pennants. If we mark the edges of the flag, we need to follow the same principles. We find the measured move and project it from the moment the flag breaks lower. The time element also applies, but between the two, the time element is far more important on the pennant rather than on the flag. The explanation comes from the long-term consolidation that makes the pattern visible – everyone sees it. But in the case of a pennant, the time is shorter so the people may not notice it. Between the two, again, pennants are more aggressive.
To sum up, pennants are more aggressive. They form during rising and falling trends and the time element plays an important role. In a pennant, the consolidation takes less time than in a flag, and the pennant forms on the horizontal, while flags form on the horizontal or against the original trend. Also, the measured move represents the move until the consolidation projected from the breakout point.
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