What is the Pennant or Flags Pattern?
The Pennant or flag pattern is a continuation pattern formed by the consolidation of prices into a tiny symmetrical triangle that resembles a pennant or flag. The mast of the flag is the distance of the previous price movements before the flag formed.
This pattern can form on either an Uptrend or a Downtrend, both in which it will still signal trend continuation. This makes us say comfortably that there are two types of pennant patterns – Bullish and Bearish Pennants.
Bullish pennant forms during an uptrend to signify that the trend will resume after such a brief consolidation occurring during the pennant formation. A Bearish pennant, on the other hand, forms during a Downtrend to show that the trend will resume when consolidation is over.
Trading Using the Pennant or Flags Pattern in Olymp Trade.
Follow the following quick steps to trade using this pattern on Olymp Trade;
1. Identify the Pennant or Flags Pattern.
Make sure you spot consolidation of prices into a tiny symmetrical triangle that resembles a pennant or a flag. Note the prevailing trend to establish whether it is a Bullish or Bearish Pennant pattern.
2. Identify the Pennant Breakout.
A Bullish Pennant will occur on an Uptrend. A pennant pattern is a continuation pattern and therefore the price is expected to breakout upwards (Breakout) and continues rising.
On the other hand, a Bearish Pennant occurs on a Downtrend. Because it is a continuation pattern, the price is bound to break out downwards (Breakdown) and continue falling.
Make sure you have seen the price break out or down from the pennant or flag dimensions before you conclude that a breakout has occurred.
3. Enter a Buy or Sell position.
Wait for the breakout to occur. Depending on the Pennant type, enter a position.
If the pennant was bullish, the breakout occurred upwards and a Buy position was in order. On the flip side, if the pennant was bearish, the breakout occurred downwards and a Sell position would do the trick.
4. Adjusting the Stop Loss.
Breakouts are not always perfect. They are sometimes fake to lure you into the trade and then the price reverses. You, therefore, need a protective stop loss to cushion you.
Place your protective Stop Loss on the Highest high of the breakout candlestick in a Sell position. Conversely, place your Stop Loss on the Lowest low of the breakout candlestick in a Buy position. The Stop Loss is this close to allow you to exit the trade easily in case the breakout was a fake-out.
5. Adjusting the Take Profit.
Now, keen attention is needed here. The distance we use to determine where to take profit is not the height of the pennant or flag. It is the height of the earlier price movement before the formation of the pennant.
This earlier price movement before the pennant formed is what we referred to as the mast. So it is the mast height or distance which is used to estimate where to take profit in the pennant pattern.
Measure the height of the mast and place your Take Profit the exact distance from the point of entry into the trade. This will give you reasonable profits given that the risk to profit ratio is reasonable – this is because the Stop Loss is placed so close to entry for easy exit.