Japanese candlestick charts? Bear pennants? Do you want to learn more about these technical analysis tools? Then read on and take a closer look at a powerful forex indicator — the bear pennant pattern.
This article will teach you to recognize and trade currency pairs using the bear pennant chart pattern.
What is the Bear Pennant Pattern?
The bear pennant is a continuation chart pattern that signals that the ongoing trend is likely to continue. It occurs during a bearish trend and indicates a possible extension of a downtrend. Forex traders use this classical chart pattern to join the existing trend and short sell an asset.
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How to Identify and Use the Bear Pennant in Forex Trading?
The bear pennant occurs during a pronounced downtrend in price. It consists of two parts: the flagpole and the pennant. The GBP/USD chart below gives us a great illustration of the formation.
Follow the progression below to identify the bear pennant:
- Spot a downtrend in price
- Draw the flag pole
- Recognize a period of subsequent market consolidation
- Draw trend lines on the upper and lower bounds
Draw the Flag Pole
A downtrend in price is a series of lower periodic highs and lows. For the bearish pennant, the downtrend is the flag pole. Once identified, a trendline may be drawn to help contextualize price action.
Draw the Pennant
The pennant is a period of consolidating price action. It signifies a tightening of the market over time. To define pennant, draw a line that connects the upper bounds of price action and a line to connect the lower bounds.
Bear Pennant Pattern vs. Bullish Pennant Pattern
Bullish and bearish pennants are both continuation technical analysis indicators. However, they differ in several ways:
- The bullish pennant suggests an extension of an uptrend.
- The bearish pennant signals the extension of a downtrend.
- The bullish pennant is a buy signal.
- The bearish pennant is a sell signal.
Below is a picture of a bull pennant. Note that the bull pennant pattern forms during an uptrend, not a downtrend. Bearish pennants form in downtrends.
How to Trade Forex Using Bear Pennant Chart Patterns – Strategies and Examples
Like all other chart patterns, there’s a process to trading bear pennant patterns. The process is simple and includes three steps: determine market entry, set the stop-loss, and assign a profit target.
The bearish pennant pattern suggests that downward pressure is on the market. Thus, a short-side market entry is appropriate. To enter the market, place a sell market or sell stop-limit/market order beneath the pennant’s lower trend line.
A new short position is opened upon the sell being executed.
When trading the bear pennant pattern, stop losses are easy to locate. Place the stop loss above the upper trend line of the pennant.
Remember, buying and selling currency pairs is done on margin. And margin carries significant risk. That’s why using stop losses in your forex trading strategies is highly recommended.
The bear pennant pattern is a signal to short the market. So, profit targets will be located beneath the pennant’s lower trend line.
Profit targets are typically aligned according to risk/reward ratios. However, no matter how you place a profit target, it will be below the bear pennant pattern on your price chart.
One of the best things about bearish pennant patterns is that they are simple to trade. The GBP/USD chart below illustrates the concepts of market entry, stop loss, and profit target location.
The GBP/USD trade above was executed as follows:
- The flag pole and pennant were constructed
- A sell order was placed at 1.3595.
- Stop-loss was placed at 1.3603.
- A profit target was placed at 1.3579 in adherence to a 1:1 risk vs. reward ratio.
- Once the price fell beneath 1.3595, a new short position was opened.
The Bearish Pennant— Pros and Cons
Although bear pennant patterns are reliable, they do have a few drawbacks. Below is a list of the essential pros and cons.
- Simple to identify, visually apparent
- Occur frequently on all forex pairs on all chart durations
- Ideal for use as a trend following strategy
- Can produce false signals
- Pennant ranges are often large
- Extensive stop losses are often required, enhancing risk
Here are the key takeaways you need to consider when trading the bear pennant pattern.
- Bear pennant patterns are continuation indicators. They signal the extension of a prevailing downtrend.
- Bear pennants are commonly found on all forex pairs on all time frames.
- To trade the pattern, the market is sold beneath the pennant’s lower trend line. Stop losses are located above the pennant’s upper bounds, and profit targets are placed below the pennant.
- The bear pennant is not 100% accurate. It’s essential to use the pattern with proper risk management in mind.
Here are a few frequently asked questions regarding bear pennant and forex trading.
What’s the difference between the flag and pennant?
A bearish flag pattern consists of a flag pole followed by a parallel trading range. For the pennant, a period of consolidation follows the flag pole. Thus, the pennant resembles a triangle pattern. In the picture below, you can see how a flag’s shape differs from the pennant.
Can I trade the bear pennant on forex, futures, and shares?
Yes. The structure and trading method for the bear pennant doesn’t change. You can use it on any market using any duration chart.
Is forex trading safe?
Yes, as long as you choose a reputable, regulated forex broker. It’s important to note that the forex is a decentralized, over-the-counter trading venue with no supreme authority. This is different from futures, which has entities like the Commodities Futures Trading Commission (CFTC) tasked with oversight.
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