Of the continuation signals out there that tend to usher in further downside movement, the bear pennant is one of the trustier ones in a bear trending environment. This chart pattern forms out of an already established downtrend and is used by traders to adjust their trades in the continuous bearish sentiment. How you can identify, trade as well as effectively use bear pennant pattern is discussed below:
How to Identify the Bear Pennant Chart Pattern
The bear pennant is one of the most reliable continuation patterns for downtrends and is common on charts. Here’s how to identify it:
Initial Flagpole: The initial flagpole is a sharp, initial move downward.
Converging Trend Lines: The pennant itself takes the shape of a symmetrical triangle marked by lower highs and higher lows. The pattern must appear to narrow down when it progresses, forming an apex.
Duration and Structure: The bear pennant is decidedly more elongated than the triangle that is symmetrical in shape but generally contains more swings in the pattern.
Once you identify the pattern, mark the trend lines connecting the lower highs and higher lows. A breakout candle breaking below the lower trend line calls for a potential short entry.
How to Trade the Bear Pennant Chart Pattern
Following is the step-by-step guide to trade the bear pennant pattern:
Step 1: Establish the Beginning of the Downtrend
Only look for the pennant pattern when the market is in a clear downtrend.
Step 2: Drawing Trend Lines
Find the lower highs and higher lows, and draw the trend lines that converge to form the pennant.
Step 3: Get Ready for the Breakout
Wait for the breakout candle to close below the lower trend line. This is your signal to go short.
Step 4: Set Stop Loss
Place the stop-loss above the upper trend line or a recent swing high to provide room for price fluctuations.
Step 5: Establishing Profit Targets
Set profit targets below the pennant at least as high as the risk-reward ratio has been realized on a successful trade, that is at least 2:1.
Example Trade
Now, imagine a chart with an intact downtrend followed by the bear pennant formation. If the price breaks below the lower trend line, traders could enter a short position with a stop loss above the highest point within the pennant. If executed well, the trade would present a very good risk-reward ratio of about 2:1, hence a good trading opportunity.
Bear Pennant Pattern: Pros and Cons
Pros
- Obvious: Bear pennants are visually apparent and can be spotted on different periods and currency pairs.
- Trend Following: It is an appropriate strategy for those traders who want to trade in the direction of the dominating trend.
- Frequent Occurrence: This pattern can be found across all major forex pairs.
Cons
- False Breakouts: Similar to other chart patterns, the bear pennant can be vulnerable to false breakouts.
- Large Ranges: The range on the pennant is sometimes extended, and hence makes it cumbersome to determine precise entry and exit points.
- Wide Stop Losses: The necessity to put stop losses outside the range of the pattern increases the risk profile.
Key Takeaways
Continuation Signal: Bear pennants are used to identify possible continuations of a downtrend.
Trade Entry: The short position is taken when the price breaks below the lower trend line.
Stop Loss Placement: The stop loss should be placed above the upper trend line or recent swing high.
Take Profit: Set the profit target below the pennant.
Risk Management: Since the bear pennant is not full-proof, proper risk management should be applied.
Conclusion
The bear pennant pattern is an extremely powerful continuation signal for bearish trends, but it is a pattern that needs to be traded with correct risk management and proper planning. For more information about how to include the bear pennant in your trading strategy, you are welcome to take a look at in-depth tutorials and practice concerning this pattern from renowned trading education websites.
