Pennant pattern

The pennant pattern is a price formation that offers plenty of great trading opportunities for binary options. Combining chances to trade all types of binary options with the ability to create exact predictions, the pennant pattern is a price formation every trader should know.

Understanding the pennant pattern

A pennant is a price formation that interrupts a trend. Instead of continuing in its main direction, the trend takes a break and remains in a sideways movement for some time. In the case of a pennant, this consolidation occurs in the form of a triangle. The market’s trading range narrows until it eventually converges, thereby forcing the market to break out of the pennant.

Usually, pennants form after the market have moved in a quick trend. After a strong movement, many traders are already invested in the asset, and there is no more momentum to keep the movement alive. There is, however, no momentum in the other direction either. Therefore, the market is stuck between an upper resistance level and a lower support level. Within these limits, the market will go through a consolation before it can resume its previous trend direction.

When this consolidation occurs in a continuously narrowing trading range, we speak from a pennant pattern. The upper resistance and the lower support converge on each other, thereby creating a price formation that resembles a pennant.

The pennant is a continuation pattern. This means, once the pennant is complete, the market is likely to resume its previous trend direction. While there are many continuation patterns, the pennant stands out for two reasons.

  • The market usually breaks out of the pennant pattern when its two lines almost touch each other. By anticipating this point, you can anticipate the break out.
  • As long as you are early in a pennant, you also know that the market will stay inside its upper and lower boundaries.
  • The pennant’s two converging boundaries are so unique that diagnosing a pennant is much easier than with other chart formations.

These two reasons make the pennant the pattern that allows the most precise predictions of all continuation patterns. Other formations, such as the rectangle formation, you only diagnose for sure when they are complete. The pennant allows you to make this diagnosis much earlier, thereby enabling you to profit more.

Of course, even the pennant is not 100 percent exact. As you can see in the picture below, prices sometimes move outside of the pennant’s boundaries. These are false signals you can ignore, especially when they occur before the pennants line almost touch each other and if they occur in the opposite direction of the previous trend.

Trading the pennant pattern with binary options

The pennant allows for three predictions that are relevant for binary options. Those are:

1. Defining the trading range.

By defining an exact upper and lower trading range, the pennant allows you to anticipate how far prices will move in the current market conditions. With this knowledge, you can invest in a number of binary options:

  • You can invest in a high / low option when the pennant is close to one extreme of its trading range, prediction that the market will trade more to the center of the pennant when your option expires. Make sure to keep your expiry short enough to complete your option before the pennant’s lines converge and the market breaks out.
  • You can invest in ladder option, predicting that the market will close below the pennant’s upper resistance or above the pennant’s lower support.
  • If your broker offers you a one touch option within the pennant limits, you can predict that the market will trigger this touch option.

2. Trade the breakout

Once the pennant is almost compete, you can anticipate the market breaking out of the pennant. The most secure investment would be to invest in a high / low option in the direction of the trend that preceded the pennant. If you want to take more risk, you can also use a one touch option or a ladder option.

3. Trade the pennant’s trend implications

As technical analysts say, the pennant usually waves at half-mast. This means that the trend has moved half of its full size when the pennant occurs. Once the pennant is complete, you can use this rough rule of thumb to predict how far your current trend can still move, thereby gaining the knowledge you need to invest in a high / low option, one touch option, or ladder option.

Combine these uniquely detailed predictions about future price movements with a little experience in recognizing and trading pennants, and the pennant can help you win a lot of your trades while still getting a high payout for each single trade.

The only disadvantage of pennants is that they are rarer than signals of lesser quality such as candlestick formations. In that sense, trading the pennant means trading quantity for quality, which is a good trade to make.

Pennant pattern
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