Today we want to take a look at a great pennant forex trading strategy. You will learn what a bullish pennant and what a bearish pennant is and how to make a pennant flag. This strategy similar to our breakout triangle strategy we have developed a while back, but only this strategy trades distinct flag pattern technical analysis.
What are Pennant Patterns? Flag and Pennants meaning
Pennant patterns form after a strong price movement. This is because after a strong upward or downward movement the buyers or the sellers take a break and battle for a short period before the trend eventually breaks out and continues the primary trend.
Let’s see an example of this:
You see above that the “pole” if you want to call it that had a strong upward movement (nearly verticle). The buyers then began to close their positions and made the trend stall and form what’s called a pennant pattern. Some sellers got in before new buyers made entries and eventually kept the main trend going to the upside. This is essentially what happens every time a pennant pattern is formed.
There are two types of pennants that form on charts:
1. Bearish Pennant= This bearish flag is formed after there is a strong downtrend (nearly verticle). The sellers close their positions to and take the profit. This consolidation will then lead to other sellers getting on board and, hence, the price will again be pushed down
2. Bullish Pennant= This bullish flag formed after there is a strong uptrend (nearly verticle). The buyers close their positions to and take the profit. This consolidation will then lead to other buyers getting on board and, hence, the price will again be pushed up.
Once the price breaks either of these “pennants”, you most likely want to get on board and trade these because the price is ready to take off and continue the main trend due to all the sellers/ buyers getting in at the same time.
We discussed this in our other article that talks about traders making trading decisions at certain places on the charts. Think about it, everyone is looking at the same charts and are seeing the same thing. When a breakout occurs, everyone sees this happen and makes a trade decision. Also, read about Scaling in and Scaling out in Forex.
The PPG trading strategy uses a few elements to help you determine a trade entry:
- Parabolic Sar Indicator
- Lines Drawn By You
- Price Action Analysis
You can trade this strategy on any time frame.
I prefer trading this on 30 min time frames and up but this still can work on 1m-15 minute charts.
Pennant Forex Trading Strategy: Steps to Trading
Step #1 Apply Parabolic SAR indicator to the chart
The Parabolic SAR indicator will show you where the main trend is heading. Check out our Parabolic SAR strategy here if you want to specifically trade with this indicator. With this strategy, we have this on the chart to help us make a great trading decision when it comes time to make an entry/exit the trade.
Step #2 Find a Strong Bullish, Bearish Trend
Most likely you will see this occur with 2-5 strong consecutive bullish or bearish candles. There are no Retracement candles; these should be unsustainable upward or downward candles.
It should look like this:
This was taken on a EURUSD 30-minute chart. Notice that the parabolic SAR dots are below the candles, which is an indication that the trend is pushing up. If the dots are below the candles, the trend is going up, if they are above the candles the trend is going down.
As you can see, this move was huge. I just three hours it moved 78 pips!
So if you were in a trade that moved 78 pips in three hours, what is most likely the outcome? You are getting out!
Which brings us to the third step.
Step #3 Analyze Consolidation After Big Price Move
Now you wait…
After that 78 pip upward move you see that many buyers got out of this trade and took their profit. Now what is most likely to occur is that there will be a short battle between the buyers and sellers at this point before a new wave of buyers will take over and drive the price up again!
You want to be one of those buyers, and that is why having a strategy like this is so important to have. Some see that move and have no idea what happened and where they should enter if the trend will continue. But you will not be one of them after you learn this strategy 🙂
What to wait for before you can enter a trade.
Step #4 Draw Pennant that is Forming
Here is how you draw this:
#1- Draw a line on the Strong Bullish candles that formed
#2, #3- Draw a line on the higher lows and lower highs (If you down know what these are tap here and I go into detail about this in our Breakout triangle strategy)
Once you do this, you are now prepared to find an entry if it breakout out of this pennant.
This is what it will now look like on the chart:
Step #5 The Breakout
The best part of this strategy is seeing that price breakout of the pennant you drew on the chart.
**Note Since this is a Bullish Pennant the price will need to breakout of the top of the pennant like you see above. If this were a Bearish Pennant, you would have needed to see the price breakout below.
Let me show you what I mean:
I gave you an example of what may occur if the pennant broke out below this Bull flag. Which is not what you want to see with this strategy. We want to trade in the direction of the main strong bullish trend!
If the price breaks below the pennant, I would not enter a trade based off of the rules of this strategy. However, there are strategies you can use to trade this but for the PPG trade strategy if the prices break below the pennant in a bullish pennant then avoid trading. The same goes for a bearish pennant. If it breaks above the pennant, then do no take the trade.
Step #6 After Breakout, Make The Trade with this Pennant Forex Strategy
So once the price breaks out of the pennant, you are technically safe to make a trade if it’s a strong breakout candle like in our example.
This is a great place to trade because if the trend continues you are in a great place to be!
Note** (This is the advanced entry position) The reason is that this is advanced is that it takes more of a price action analysis that beginner traders may not know what to be looking for.
Another place you could make your entry is when the price breaks the top of the pennant. (For beginner traders I recommend this entry position)
All you do is draw a horizontal line at the top of the pennant, and once the price action breaks this you make a buy entry like you see below:
So in this example, you actually would have gotten in about halfway in that strong bullish breakout candle. The reason is that recommend this entry for beginner traders is that this takes to price action analysis out of the picture to determine if the candle is a strong bullish candle or not. You draw a simple line. The price breaks that line, and you trade it!
Take Profit/ Stop Loss
The price should move rapidly, and you should be in profit in a short period.
To place you stop loss, determine a support/resistance area and place in below this in a buy trade or above this area in a sell trade.
The rule of thumb with these pennant patterns that the second breakout will move as far as the first. The first bullish trend, as you recall me saying, moved 78 pips in 3 hours. So we technically could shoot for another 78 pip move.
Always be mindful of price action when you are in a trade, though.
As you can see above, this trade moved a total of 70 pips on the second move where we entered the trade based off of the strategy. Very close to 78 pips, but not quite.
Personally, I stay in a trade with this strategy until I see price action consolidating by analyzing Parabolic SAR and studying the price movement.
I would have exited here:
We closed this trade with a +68 pip win.
The parabolic showed us five consecutive crosses above the candles. This could be a sign that this upward move is over and you should consider exiting like so many other traders are doing.
That is what’s nice about the Parabolic SAR. When you see something like that (5 consecutive dots), you can have a good idea as to what the trend may do shortly. If you spot this occurring and you see price action consolidating then consider a trailing stop, or exiting the trade altogether.
The Pennant Forex Trading Strategy is easy to learn and with a little practice could be all you need to make a living trading. These are some of my favorite patterns to spot and trade. We talked briefly about support and resistance areas with this strategy, and if you still are not quite grasping what we mean, check out the Rabbit Trail Strategy that talks a lot about this.
Thanks for reading!
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