Chart patterns are widely used in technical analysis. They help a trend continue or reverse. Furthermore, there are bullish and bearish chart patterns. Bullish patterns predict the prices to increase and bearish patterns predict that prices will fall.
Bear Pennant definition
Bear Pennant is a continuation pattern that helps a trend continue downward. Bear Pennant is formed in a bear market.
Why is understanding the Bear Pennant important for traders?
- Trading the bear pennant pattern offers a good risk/reward ratio. The pattern can be an excellent addition to traders’ trading strategies.
- Understanding bear pennant can help you manage or avoid trading against the pattern even if you do not plan to trade the Bear Pennant.
- Bear Pennant is easy to spot on the chart and doesn’t require any special indicator.
Thorough Bear Pennant Explanation
Now let’s take a look at how to identify bear pennants in trading. Bear Pennant takes shape after a sharp decline in price. The sharp decline is followed by consolidation. The consolidation phase shows that bulls are trying to get the price higher and fail each time. Consolidation price is characterized by lower highs and higher lows. Price Moves between Trendline Resistance and Trendline Support lines until it breaks.
The Breakout point is also known as the activation and final point. As the price breaches the Trendline Support, the pennant is considered to be completed and ready to be traded by going short.
Many novice traders make that mistake and enter the trade too early, until the breakout point is reached. The chances of failure increases when trading unfinished patterns as price action can always reverse the trend. Patterns are great as they increase the likelihood of success and they only work when they are ready to be entered.
Example of Bear Pennant in Forex
Bear Pennants are easy to spot on charts. They appear in bear markets. Price declines are also called Bear Pennants’ Flagpoles. These Flagpoles are followed by a period of consolidation and Breakout.
As with most other chart patterns, Bear Pennants work better in larger time frames due to reduced market noise. And volume usually increases before the breakout.
Bear Pennant is a technical tool and the pattern doesn’t take into account important news announcements. Thus, it’s best to use the pattern in a context.
In this example, the traders enter the downtrend as soon as the price breaches the support line. Stop Loss is placed outside the resistance line and the Take Profit potential is as high as the length of the Flagpole. To ensure profits, some traders use trailing take profits and gradually reduce exposure.
FAQs on Bear Pennant in Trading
How can you tell a bear pennant?
You don’t need any indicator to spot the pattern. You can visually identify a Bear Pennant as it has a very simple form. Takes shape in a bear market. Price decline is followed by a period of consolidation and the consolidation phase is followed by breakout.
How to read bear pennant patterns?
Wait for the Pennant to fully form. The pattern can only be entered once the breakout phase is reached. Bear Pennant is a bearish continuation pattern, therefore you can only short the position and the potential take profit is as high as the Pennant’s Flagpole.