DavidWaring

In our last lesson we learned about the flag and pennant chart patterns, how to identify them on a chart, and when the pattern is a bullish or bearish sign. In this lesson we are going to learn how to identify entry and exit points for potential trades after spotting these patterns on a chart.

As we learned in our last lesson when you spot a flag pattern in an uptrend this is a bullish sign as the market consolidation which forms the flag is seen as a pause before a resumption of the original uptrend. As this is the case when traders spot these patterns on a chart they will commonly look to enter a buy position. The entry point which they will commonly use to enter the long position is the breakpoint of the upper line of the flag which is resistance. The target for the trade is then calculated by measuring the distance between the start of the up move and the highest point on the flag and then projecting that upwards. The stop is then placed just below the bottom support line of the flag.

Example of the Bull Flag Trading Strategy:


The strategy is exactly the same for the bull pennant, with one exception. When trading the bull pennant the stop loss is placed just below the bottom trend line, in line with the closest trough.

Example of the Bull Pennant Trading Strategy:


When you spot a flag pattern in a downtrend it is a bearish sign as the market consolidation which forms the pattern is seen as a pause before a continuation of the original downtrend. As this is the case when traders spot this pattern on a chart they will commonly look to enter a short position. The entry point that is normally used when trading this strategy is to sell on a break below the bottom support line. The target is then calculated by measuring the distance between the start of the down move and the lowest point on the flag and then projecting that downwards. The stop is then placed just above the upper resistance line of the flag.

Example of the Bear Flag Trading Strategy:


The strategy is exactly the same for a bear pennant, with one exception. When trading the bear pennant the stop loss is placed just above the upper trend line, in line with the closest peak.

Example of the Bear Pennant Trading Strategy:


So that completes this lesson. You should now have a good understanding of the strategies used to trade flag and pennant patterns as well as how to identify these patterns on a chart. In our next lesson we are going to look at the triangle chart pattern and how to spot this on a chart so we can look at ways to trade that continuation pattern. So we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

amo1ro

Hi Dave ,

Thanks for your quick reply regarding to my previous question "Double top" anyway whatd do you think about this pennant during the anouncement ?

Thanks,

Almos

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David Waring

Hey Almos,

My pleasure. This one I would consider more of a triangle or wedge rather than a pennant as generally what you want to see with a pennant is a large runup before the pennant forms which forms the pole.

Let me know if that does not make sense or if you have any other questions.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

amo1ro

I see ,thank you

dma

Hi Dave


Why do you extrapolate the pole all the way up to 32?

This pennant is supposed to be pole-less just like a symmetrical triangle.

David Waring

Hi DMA,

The only difference between a flag pattern and a pennant pattern is that in a flag, the period of consolidation in the market which forms the flag is made up of a range in the market that is generally the same height across the consolidation. The pennant on the other hand is made up of a range in the market which contracts as time goes on forming the two lines which come together to a point at the end which forms the pennant.

Both patterns however are preceeded by a sharp runup or rundown in the market which forms the pole portion of the patttern. With this in mind, a pennant pattern without the pole is not a pennant but a triangle. What differentiates the pennant from the triangle is the pole portion of the pattern.

Hope that helps.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

dma

Thanks

But I what I wanna know is how to determine the height of the pole

How did you get 32?

David Waring

Hi DMA,

Sure thing. I am viewing 32 here as the level where the sharp downmove before the consolidation period which formed the pennant began.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Fallon

Hi dave and great website!

I was just wondering about the timescale of these strategies.I'd imagine it would be about a week or so before u'd be in profit if all goes well...or is it quicker than that? Thanks

David Waring

Hi Fallon,

Glad to hear from you and thanks for the compliment I am glad you like the site.

I am an intermediate term trader so I generally focus on the daily charts and my trades usually last from a couple of days to a couple of weeks. With this in mind in my lessons I generally used daily charts and above however shorter term traders also look for patterns like these on shorter term charts such as the hourly or 5 minute charts for example.

So to answer your question it depends on the timeframe that a trader is trading. Generally the trades of traders who generate their trades from longer term charts are going to last longer than traders who generate their trades from shorter term charts.

Let me know if that does not make sense or if you have any other questions.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.