swing trading

Bullish Pennant Chart Pattern - How It Works and How Traders Can Use It

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When it comes to the stock market, sometimes you might hear the term "bullish pennant" mentioned. It refers to a stock chart pattern that is popular among active stock traders.

This article will explain what a bullish pennant chart pattern is and how traders might be able to benefit from using it.

 

What Exactly Is a Bullish Pennant?

A bullish pennant is a stock chart pattern characterized by three trend lines.

The first trend line is on the left side of the pattern and is typically a steep upward sloping line. This is considered the "flagpole" of the bullish pennant pattern.

The other two trendlines serve as the "flag". They converge to form the shape of a sideways triangle. One is a downward sloping line of resistance along the top that connects the price peaks. The other is an upward sloping line of support along the bottom that connects the price troughs.

The triangular flag pattern connects to the top of the flagpole trendline in a bullish pennant.

 

 

That image is a graphical icon that gives an idea visually of what a bullish pennant chart pattern looks like.

 

What Does a Bullish Pennant Look Like On A Stock Chart?

The image below is an example of a bullish pennant as shown on one of our stock charts.

 

 

There are golden lines on our charts that automatically outline chart patterns when they're detected.

You can see the steep line on the left that serves as the flagpole.

You can also see the triangular flag (or pennant) that has a downward sloping top line where the resistance level is and an upward sloping bottom support level. The flag connects to the top of the flagpole.

All three lines make up the pattern. A bullish pennant is essentially a wedge with a flagpole.

 

How Do Traders Use a Bullish Pennant?

The appearance of the bullish pennant pattern indicates that there was a recent price surge (the flagpole trendline), and since then the price has been consolidating (the triangular flag).

During the consolidation period, the price is making a series of higher lows (indicating buying pressure) and lower highs (indicating selling pressure). The price range between the highs and lows is therefore getting tighter and tighter.

Since the consolidation was preceded by a price surge, traders might anticipate that the stock price will resume its climb if it breaks out of the consolidation cycle.

Traders are therefore typically waiting to see the price make a strong move upward past the upper resistance line of the flag pattern. It can be considered a breakout entry signal. Traders might anticipate a continuation of upward price movement after the breakout.

 

Is a Bullish Pennant Bullish or Bearish?

Bullish pennant chart patterns are considered bullish, as the name implies, meaning that the presence of a bullish pennant on a stock chart might be an indication that the stock price is on the verge of going up.

Since a bullish pennant is considered bullish, it means traders might try to capitalize by going long (meaning that they would be buying instead of shorting).

 

How Do You Find Stocks That Have Bullish Pennant Patterns?

You can find them by using our Bullish Pennant scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks that are in a bullish pennant chart pattern.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock charts manually to find stocks with a bullish pennant pattern.

 

Example of a Bullish Pennant Trading Strategy

For this example of a bullish pennant trading strategy, we're going to use a daily chart, where each price bar represents one day of price activity. That means it would be a swing trading strategy where the trade is designed to last more than one day but not for the long haul.

 

Entry for the Bullish Pennant Trading Strategy

The entry for this Bullish Pennant trading strategy will be as follows:

The entry criterion for our Bullish Pennant trading strategy is very simple. You can see in the stock chart below for Lear that the entry price would be right around $97, where that upper golden line is.

 

 

Exit for the Bullish Pennant Trading Strategy

There are a lot of possibilities here for the exit.

One benefit of using a stock chart pattern as a basis for making trades is that the pattern itself can help you determine exits in some cases.

For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.

Not everyone uses all three, and that's totally fine. Ultimately, you can set these values however you want. But for the purposes of this strategy example, we will define all three:

 

1. Profit Target

We will set the profit target at 3 ATRs away from the entry price.

ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.

Our profit target criterion indicates that we will take the ATR value of the stock, multiply it by three, and add it to the price we paid when we bought the stock. That will be our profit target and we can set up a sell limit order at that price.

2. Stop Loss

We will set the stop loss at 0.5 ATRs below the support line (the bottom trendline of the bullish pennant). This means we take the ATR value of the stock, multiply it by 0.5, and subtract it from the price of the lower trendline from that day.

That will be our stop loss and we can set up a stop order at that price.

3. Time Limit

We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven calendar days after entry.

 

How Well Do Bullish Pennants Actually Work?

The idea of a bullish pennant trading strategy sounds nice to many people because it offers a clear, easy-to-understand way to find and manage a trade setup.

But does it actually work? Can traders indeed generate profits by trading bullish pennant chart patterns?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that trades based on a bullish pennant are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary bullish pennant trading strategy we created has performed historically according to backtests:

 

 

Anyone who signs up for our swing trading scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Bullish Pennants

You can contact us any time if you would like to ask any questions about bullish pennants or anything else related to the stock market.