TRIANGLES AND PENNANTS
Pennants, triangles and flags provide great trading opportunities for traders. They form when price is being squeezed or consolidating before either a change in direction or continuation in trend and usually followed by momentum.
As you will see from the image on the left the pennant is a build up of consolidation. You would be able to buy or sell the breakout. Make sure you wait for price to break and close outside the Pennant or triangle before entering. This minimises the trap of the false breakout.
When your ready to enter short you would set your stops above the last lower swing high. If you are entering long you would set your stops below the last higher low.
Make sure you don’t place your stop loss too close to the current price, you may think that you’re minimising your risk but you’re actually making it more likely to be hit.
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When trading the breakout two things can happen:
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1) Momentum kicks in and takes your trade straight into profit
2) The trendline is retested before going into profit.
The Pennant is consolidation before the break out
Whether it breaks to the upside or downside, you treat it exactly the same. Wait for the break and close, work out your risk to reward ratio and place your stop loss appropriately as shown in the example here.
Aggressive traders can enter at just the break of the trendline but you have to be very careful of the false breakouts.
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Price could breach your trendlines but if it closes inside the pennant then this shows us that price is respecting these diagonal lines which could lead to it reversing into the opposite direction again.
The Ascending Pennant, where we favour the long trade
The market is creating equal levels of resistance and higher levels of support. So with the Ascending Pennant price is also consolidating but in this case we would favour the long trade, as the trend is moving in that direction.
The Ascending Pennant Possible outcomes
You can see this on these examples, the resistance stays the same, but the levels of support continue to the upside (Higher low, resistance, higher low, same resistance).
The Descending Pennant
On the other hand you have the Descending Pennant where price is creating an equal level of support but lower levels of resistance. Here the short trade is favoured but again it can go either way.
We treat these the same as the ascending pennant, price is consolidating, wait for the break and close above or below your trendline or support and execute your trade.
So the rules that you need to stick to when trading these triangles/pennants are as follows:
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- Find out what trend you are in (bullish/bearish), switch to higher
timeframes to help establish which
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- Plot on your trendlines (long term/inner/outer) and levels of support and resistance
- Draw on your pennant/triangle lines
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- Stoploss placement should be clear now for you, don’t trade without one.
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- Wait for a clean break and close of the candle before entering, don’t jump the gun.