Flags and pennants in forex
Story continues How to Trade the Forex Patterns In an uptrend, traders can place a stop below the pennant consolidation and place an entry order four pips above the highest swing high within the pattern. A protective stop can be placed four pips below the lowest swing low within the pattern. In a downtrend, traders can place a stop four pips above the highest swing high within the pattern. An entry order can be placed four pips below the lowest swing low within the pattern Unlike triangles which could breakout up or down to either continue the trend or reverse the trend, pennants are continuation price patterns.
This characteristic can provide traders a greater degree of confidence in knowing the direction to trade. Knowing the direction to trade is half the battle and when a pennant is raised on the chart, traders can act decisively!
Follow me on Twitter gregmcleodtradr. I have just shared with you how to tell the difference between a pennant and a triangle price pattern along with rules to trade them. Learn how to incorporate RSI with these patterns to increase reliability. Sign our guestbook to access a short 20 minute free tutorial on this and other essential indicators.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. The Figure 3 illustrates a typical bearish flag pattern. Figure 3: Bearish Flag Example The next chart below, Figure 4 shows an example of how the bearish flag is traded.
Figure 4: Bearish Flag Trade Example An interesting point to bear in mind in the above bearish flag trade example is the retest of the break out level. This retest may or may not happen, but it does remind traders that trading on a retest of a break out price level is always a safe option. However, this is not always as the case as in most cases with flags, the break it sharp and quick.
In the case of the above bearish flag break out, despite the rally back to retest the break out level, price did manage to reach the minimum price objective. Trading the Pennant Patterns The pennant patterns are similar to flags, with the main difference being that the patterns are formed as converging trend lines into a triangle.
The bullish and bearish pennant chart patterns work on the same principles of the flag patterns. The following chart shows a bearish pennant pattern. Figure 5: Bearish Pennant Example As seen by the above chart, the bearish pennant pattern is identified by converging trend lines forming a pennant that is sloping upwards at the bottom end.
The pattern is somewhat similar to a symmetrical triangle formed within a smaller number of candles, but preceded by a sharp bearish drop. Figure 6 illustrates a bearish pennant example. When taken in view of the larger chart pattern, the bearish pennant, the fakeout could have been easily avoided. Price eventually manages to break lower out of the pennant pattern eventually retesting the break out before dropping to reach the price objective. Figure 6: Bearish Pennant Trade Example The bullish pennant pattern is the opposite of the bearish pennant pattern and almost similar to a bullish flag pattern, with the exception that the pennant is formed by converging trend lines forming a symmetrical triangle.
The chart below, Figure 7, shows a bullish pennant example and how it can be traded.
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