Pennant Pattern Forex Trading Strategy: PPGโ€™s Winning Formula

15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

Today, we want to take a look at a great pennant pattern Forex trading strategy. You will learn what a bullish pennant is, what a bearish pennant is, and how to make a pennant flag. This strategy is similar to theย breakout triangle strategyย we developed a while back, but only this strategy trades distinct bullish or bearish flag pattern technical analysis.

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If youโ€™re a brand new trader, we recommend hopping over to our ultimate beginnerโ€™s guide to trading to learn more.

By delving deeper into the world of trading, weโ€™ll explore the intricacies of the bull pennant pattern and the bear pennant pattern, two pivotal elements in this advanced trading strategy. Understanding these patterns is crucial for any trader aiming to leverage market trends effectively.

What Are Pennant Patterns?

Pennant patterns form after a strong price movement. This is because, after a strong upward or downwardย movement, the buyers or the sellers take a break andย battle for a shortย period before the trend eventually breaks out and continues the primary trend.

Letโ€™s see an example of this:

Identifying Pennant Patterns

You can see above that the โ€œpole,โ€ 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 whatโ€™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 what happens every time a pennant patternย is formed.

There are two types of pennants that form on charts:

Bearish Pennant Pattern

This bearish flag pattern is formed after there is a strong downtrend (nearly verticle). The sellers close their positions and take the profit. This consolidation will then lead to other sellers getting on board, and hence, the price will again be pushed down.

Example:

Bearish Pennant Pattern

Bullish Pennant Pattern

This bullish flag formed after there was a strong uptrend (nearly verticle). The buyers closed their positions and took the profit. This consolidation will then lead to other buyers getting on board, and hence, the price will again be pushed up.

Example:

Bullish Pennant Pattern

Once the price breaks either of these โ€œpennants,โ€ you most likely want to get on board and trade these because the price is ready to take off and continue theย main trend due to all the sellers/ buyers getting in at the same time.

We discussed this in our other article about traders making trading decisions at certainย places on the charts. Think about it: everyone is looking at the same charts and 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:

  1. Parabolic Sar Indicator
  2. Lines Drawn By You
  3. Price Action Analysis

You can trade this strategy on any time frame. I prefer trading this on 30-minute time frames and up, but this can still work on 1- to 15-minute charts.

Pennant Pattern Forex Trading Strategy: Steps to Trading

Embarking on the Pennant Pattern Forex Trading Strategy involves mastering the nuances of the bull pennant pattern and the bear pennant pattern. Each step in this article is designed to guide traders in capitalizing on these patterns, whether in bullish or bearish market conditions, to make informed and strategic trading decisions.

Step #1: Apply the Parabolic SAR Indicator to the Chart

Sar Indicator To Chart

The Parabolic SAR indicator will show you where the main trend is heading. Check out our Parabolic SAR strategy if you want toย specifically trade with this indicator. We have this strategy on the chart to help us make a great trading decision when it comes time to make an entry/exit 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:

Forex Flag Pattern Indicator

This was taken on a EUR/USD 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. On the other hand, if they are above the candles, the trend is going down.

Check out this article for a step-by-step guide on a chart pattern trading strategy!

As you can see, this move was huge. In just 3 hours, it moved 78 pips!

So, if you were in a trade that moved 78 pips in 3 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 waitโ€ฆ

Big Price Movement

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 notice this move and have no idea what happened and where they should enter if the trend continues. However, you will not be one of them after you learn this strategy.

Nowโ€ฆ

What to wait for before you can enter a trade.

Step #4: Draw Pennant That Is Forming

Here is how you draw this:

Finding An Entry Using Pennant Drawing

#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 donโ€™t know what these are, tap here, and I will go into detail about this in our Breakout triangle strategy)

Once you do this, you are prepared to find an entry if it breaks out of this pennant.

This is what it will now look like on the chart:

Strong Bullish Candles

Step #5: The Breakout

Ah yesโ€ฆ

The best part of this strategy is seeing the price breakout of the pennant you drew on the chart.

Breakout Candle Pattern

**Note: Since this is a Bullish Pennant Pattern, the price will need to break out of the top of the pennant, as you see above. If this were a Bearish Pennant Pattern, you would have needed to see the price breakout below.

Let me show you what I mean:

Bull Flag Vs. Bear Flag

I gave you an example of what may occur if the pennant breaks 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 on 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 pattern, then avoid trading. The same goes for a bearish pennant pattern. If it breaks above the pennant, then do not 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 itโ€™s a strong breakout candle like in our example.

Pennant Pattern Forex Trade

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 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 in the image below:

Price Action Analysis

So, in this example, you actually would have gotten in about halfway in that strong, bullish breakout candle. The reason that I recommend this entry for beginner traders is that this takes 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 with Support and Resistance Lines

The price should move rapidly, and you should be in profit in a short period.

To place your stop loss, determine a support/resistance area and place it below this in a buy trade or above this area in a sell trade.

Support And Resistance Lines

The rule of thumb with these pennant patterns is that the second breakout will move as far as the first. Moreover, 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 on the strategy. Very close to 78 pips, but not quite.

I stay in my personalized trading strategy until I see price action consolidating by analyzing Parabolic SAR and studying the price movement.

I would have exited here:

Analyzing Parabolic Sar And Price Movement

ย 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 whatโ€™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.

Conclusion

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 lines with this strategy, and if you still are not quite grasping what we mean, check out the Rabbit Trail Strategy, which talks a lot about this.

Thanks for reading!

Please leave a comment below if you have any questions about Pennant Forex Trading Strategy!

Also, please give this strategy a 5 star if you enjoyed it!

Pennant Pattern Forex Trading Strategy Video

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Pennant Forex Trading Infographic
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15 Price Action Patterns Insiders are Using If a hedge fund managers were using 15 specific price action patterns would you want to know?

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  1. A lot of useful info. I am always looking to turn ideas into EAs.
    The highest high (horizontal Line) is the buy decision price. What would be a max candles back to access this.?

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