How to trade pennant pattern
Pennant graphical analysis pattern is like the Flag pattern, a signal to continue the trend after a stop. You can set up a strategy by using Pennant pattern for buying Call or Put options.
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The figure is somewhat reminiscent of a Triangle, or rather one of its varieties, called Symmetrical triangle. However, a significant difference with the similar Triangle pattern is the fact that the formation of the Pennant is much shorter than the one of a Triangle formation.
Pennant pattern formation
Moreover, Pennant in some characteristics is similar to Flag figure. It also shows the continuation of price movement main direction. At the same time, the difference between this pattern and Flag is that Pennant local support and resistance levels are not parallel to each other and converge at a single point.
Pennant may be both bullish (i.e. formed in the growing market) and bearish (its formation occurs on a downward market).
It should also be noted that Pennant graphical analysis pattern has a slight slope on the opposite side of the current trend. Therefore, in order to determine the future direction of a price movement we can use the presence of the so-called flagpole, i.e. trend preceding the formation of the Pennant.
After the Pennant chart pattern is formed, the price usually breaks the resistance level (top line, which is held on the highs) and the trend resumes. This graphic figure represents a small respite, which takes the bulls (in the growing trend) or bears (in a downtrend).
This respite is associated with the appearance of balance in the number of buyers and sellers, as well as fixing deals. But we should not forget that when developing this figure, the price rushes downstream of the primary trend, which shows the end of the period of temporary price consolidation.
Buying Call option at a bullish market
When using Pennant binary option trading strategy in a growing market, it is recommended to buy Call options at the moment when the price on the chart overcomes the resistance line. The breaking of the upper face of the pulse usually gives a strong impetus in the direction of the current trend.
Testing of this figure occurs when the price is not only broken by the upper line of the Pennant, but it is able to gain a foothold on it. Otherwise, it is possible to form other graphic patterns, as well as changes in the general direction of the price.
Buying Put option in a bearish market
Regarding the application of Pennant binary options trading strategy in a bearish market, it is recommended to buy a Put option at the moment the price is overcoming the support level. After that, just as in the example of Pennant in a bullish market, the price usually gets a strong impetus for further downward movement.
As for working out of this pattern, it occurs when the price is fixed at the level of support. It is very important to wait for this moment before buying the option. Because the breakout may be false, the price will go back and the pattern will not work. Also, there is a likelihood of changing a downtrend trend to an upward.
The most important thing for a trader – to be able to correctly identify what kind of shape is formed on the chart. After all, you can easily confuse Pennant, for example, with the Triangle. To avoid this, you must pay attention to the existence of the flagpole, as well as the time that is spent for the price formation.