Bull Pennant: Why Traders Lose With This Pattern

Exercise great caution when trading bullish pennants!

Traders must be cautious when trading bull pennants. Published research reveals a low success rate of 54% and a meager price increase of 7%. This implies pattern trading bullish pennants is as good as coin-flipping with unfavorable odds.

Key Takeaways

  • The bullish pennant pattern looks like a triangular flag with a pole.
  • The pole is a sharp price incline; the flag is a price consolidation.
  • A bullish pennant is a supposed continuation pattern, but in reality, it can also signal a reversal.
  • Bullish pennants should be avoided as they have a low probability of success.
  • If a bullish pennant is successful, its average increase is only 7%.

Much has been written about bullish pennants, which are popular with traders, but academic research suggests that pennant patterns should not be used. Source.

What Is a Bullish Pennant Pattern?

A bullish pennant is a popular yet widely misunderstood technical analysis pattern characterized by a period of consolidation in the form of a symmetrical triangle. Generally, this pattern is regarded as a continuation pattern and appears after a sharp rally. It is composed of two converging trendlines connecting highs and lows and followed by a breakout to the upside.

The origin of this pattern can be traced back to Charles Dow’s writings, which proposed that a triangle pattern is typically seen as a continuation of the current trend. According to Dow’s theory, if prices break out higher from the pennant pattern, this would indicate further bullish momentum and possibly suggest prices will reach an even greater high than before the formation of the pennant.

Bull Pennant Pattern
Bull Pennant Pattern

The bullish pennant is a continuation pattern that occurs during a volatile price decrease, followed by an upward price consolidation. The price consolidation is caused by short traders who profited from the strong trend, taking profits, and traders looking for bargains.

Auto-detect All Chart Patterns with TradingView

Why You Should Avoid Bullish Pennant Patterns

Although this pattern is generally seen as a continuation pattern, there are many scenarios in which it can be considered as a “false breakout” to the downside. This could occur if prices break out lower from the pennant and form a new low after the formation of the symmetrical triangle. This would indicate a bearish reversal and potentially suggest a significant price decline in such cases.

Therefore, traders should be aware that the bullish pennant pattern is unreliable and can sometimes lead to false breakouts in either direction.

How Reliable is a Bullish Pennant?

A bullish pennant is not reliable or accurate, with a 54% success rate on an upside breakout, achieving an average 7% profit in bull markets. This pattern’s failure rate is 46%, which must be avoided.

Chart Pattern Success Rate Average Price Change
Bullish Pennant 54% +7%

Source Research Courtesy of Tom Bulkowski@The PatternSite.com.

Why Most Bullish Pennants Fail

Bullish pennants fail because the period of price consolidation after the price rise does not allow a strong imbalance in the supply and demand between buyers and sellers to form. Therefore, the pattern is weak and unreliable.

Bullish Pennant Chart Confirms It Is Unreliable
Bullish Pennant Chart Confirms It Is Unreliable

This bullish pennant chart has been autodetected using TradingView’s pattern recognition algorithms. Notice how the target price is automatically calculated.

Auto-detect All Chart Patterns with TradingView

Due to the nature of this pattern, it is difficult to determine which way prices will break out and if a breakout is likely at all. This makes it difficult to anticipate price movements and can lead to losses.

Also, the shape of the pennant itself often resembles other patterns, such as a symmetrical or ascending triangle, making it more difficult to determine price movements accurately. Furthermore, the pattern is usually only in play for a relatively short time frame, so if prices do not break out before the timeframe expires, it can lead to a loss.

How to Identify a Bullish Pennant Pattern

A bullish pennant pattern is characterized by a small body with low volatility initially, followed by an increase in volatility and a break out of the trend line. It often takes the form of two converging support/resistance lines that contain prices until they break out.

The key element of a bullish pennant pattern is that it must appear after an uptrend, as this is the only way to ensure that there will be a breakout. An uptrend must have existed before the pennant forms, and prices should move significantly higher following the breakout.

The confirmation of a bullish pennant pattern comes when prices break through the upper trend line and continue moving higher.

Bull Pennant Pattern
Bull Pennant Pattern

Above, we see a typical example of a bullish pennant failing. Instead of moving up, the price broke out upward and made a small new high before continuing further consolidation. The research shows bullish pennants only make a price move of 9% after a breakout. This is very low compared to inverse head and shoulders or double bottom patterns.

Is the Bullish Pennant a Continuation Pattern?

The bullish pennant pattern is considered a continuation pattern, but the evidence shows it is both a continuation and a reversal pattern. The bullish pennant has an almost 50% chance of continuing or reversing the trend. Considering the average change after the breakout is only 9%, it is not worth trading this pattern.

How To Trade a Bullish Pennant Pattern?

Statistical evidence suggests you should not trade a bullish pennant. The bullish pennant is an unreliable indicator, as evidenced by 1,600 perfect trades tested in the Encyclopedia of Chart Patterns.

When trading a bullish pennant chart pattern, traders should wait for the price to break out in either direction and place a tight stop loss because of the unreliability of this pattern.

It is important to note that traders should wait for a confirmed breakout above the pole peak before entering a trade, as false breakouts above or below the flag triangle pattern can often occur.

Traders should pay attention to volume when trading a bullish pennant chart pattern. Higher volume on the upward breakout is often considered a trend confirmation. This means traders should be vigilant and wait for higher volumes before entering a trade on any breakout situation.

The Psychology of Bullish Pennants

The psychology of the bullish pennant is in the consolidation period, which occurs during the flag portion of the pattern and represents a psychological battle between buyers and sellers.

In this case, buyers attempt to push prices higher while sellers try to keep them down. This tug-of-war can often drive prices into a tight range, where they may remain for a few weeks.

Once the buyers have won out and caused prices to break above resistance, there is usually an influx of new buyers, resulting in higher volumes and increasing prices. This is known as the breakout phase and is what allows traders to capitalize on the move.

The Bullish Pennant Timeframe

Bullish pennants can form on any timeframe but occur more frequently on intraday and hourly charts. Pennants happen quickly and usually last no longer than three weeks.

What Happens After a Bullish Pennant?

Two decades of research by Tom Bulkowski show that after a bullish pennant pattern is confirmed on a price breakout, there is a 54% chance of a successful trade averaging 7%. These are very poor probabilities and will negatively impact a trader.

What Happens with a Failed Bullish Pennant Pattern?

A bullish pennant in a bull market fails 46% of the time. When a bullish pennant pattern fails, the asset price fails to achieve the price target or reverses, pushing the trade into a loss situation. At this point, it makes sense to discard the pattern.

How to Automatically Identify Bullish Pennants?

You can automatically identify bullish or bearish pennant patterns using TradingView. Go to TradingView and click Indicators > Technicals > Patterns. Next, select Bullish Pennant Chart Pattern. Now, a chart with a bullish pennant pattern will be clearly marked.

Automatic Pattern Recognition with TradingView
Automatic Pattern Recognition with TradingView

Auto-detect Bull Pennants with TradingView

What are the Bullish Pennant Rules?

  1. Do not trade the bullish pennant.
  2. The bullish pennant patterns appear during moderate price rallies.
  3. The bullish pennant is more successful after an extreme price decline.
  4. If the price breaks out lower, the pattern has failed.

The Best Chart Pattern Scanners

Two trading platforms offer deep pattern scanning and screening: TrendSpider and FinViz. Finviz is a good free pattern scanner, whereas TrendSpider enables full backtesting, scanning, and strategy testing for chart patterns.

TrendSpider Chart Pattern Scanning

Scanning for chart patterns with TrendSpider is easy. Visit TrendSpider, select Market Scanner >  All of the Following > Chart Pattern > Scan. You will be presented with a list of stocks with bearish patterns.

How to Scan & Backtest Stock Chart Patterns With TrendSpider
How to Scan & Backtest Stock Chart Patterns With TrendSpider

Scan for this Chart Pattern with TrendSpider

Using AI-Driven Technical Analysis

One of the major benefits of using AI-driven technical analysis tools like TrendSpider is the ability to backtest historical data. This allows traders to compare the performance of their strategy over different periods and markets. With TrendSpider, you can go back in time to find stocks exhibiting bullish pennant patterns and then use the platform’s advanced analytics tools to analyze how effective this pattern was for trading at any given time. TrendSpider’s AI-driven algorithms also help traders identify the most reliable entry and exit points for patterns.

Scan for Profitable Patterns with FinViz

FinViz has a great feature for scanning for bullish pennant patterns. You can easily find stocks exhibiting this pattern by selecting a bullish pennant as your scan criteria. This is especially useful to traders who want to monitor potential trading opportunities.

Set Up Stock Chart Pattern Scanning with Finviz
Set Up Stock Chart Pattern Scanning with Finviz

Scan for this Chart Pattern with FinViz

The first step to finding stocks with bearish patterns is to select a set of criteria. FinViz offers a range of pre-defined filters and sorting options, enabling traders to quickly narrow their search by sector, industry, market capitalization, and more. After selecting the desired criteria, traders can apply the filter to the Finviz screener.

Once the filter has been applied, traders can then view the results on a chart interface. Depending on the complexity of the search, several stocks may meet the criteria. By clicking on each stock name, traders can open up a chart.

Frequently Asked Questions

Is a bullish pennant pattern profitable?

No, a bullish pennant pattern is a weak signal for traders and is not profitable. It provides an inaccurate way to identify potential buying opportunities creating low-probability trades. Tom Bulkowski's research confirms an accuracy of 54 percent for bullish pennant patterns with an average profit potential of 7 percent.

Can a bullish pennant fail?

Yes, almost half of the bullish pennants fail. The typical bullish pennant identified has a weak trend after the pattern confirms, meaning the price has a high probability of retracing against the trade.

How reliable is a bullish pennant pattern?

The bullish pennant pattern is an unreliable chart indicator, with success rates of 54 percent during a bull market and a low average profit of 7%. It is one of the most inaccurate chart patterns.

Is a bullish pennant good or bad?

Considering the evidence, the bullish pennant is a bad pattern for traders to use. Do not trade bullish pennants, they have a 46% failure rate, and even if they succeed, they only average a 7% price increase.

What is the success rate of a bullish pennant?

According to Tom Bulkowski's research, the success rate of a pennant is a 54 percent chance of a 7 percent price increase in a bull market on a continuation of an uptrend. Traders should remember that there is a 46 percent false signal risk.

How do you target stop losses in bullish pennant patterns?

Traders should set the approximate target stop loss level in a bullish pennant at the point below the breakout of the bullish pennant. The exact percentage stop loss depends on the price target expectations and the timeframe.

What are the benefits of trading bullish pennants?

There are no benefits to trading bullish pennant patterns. The bullish pennant setup provides a very limited 7% gain and an erratic trend. Additionally, traders cannot identify accurate target prices before entering the trade.

What are the risks of trading a bullish pennant?

The biggest risk of trading a loose bullish pennant is a 46 percent chance of the pattern failing. Traders must ensure they identify a better-performing pattern with a higher success rate, or the trade may fail.

Do bullish pennants hold?

Bullish pennant patterns hold only 54 percent of the time, according to decades of research compiled by Tom Bulkowski in his book The Encyclopedia of chart patterns. This means it should not be used for trading.

How to identify bullish pennants?

Bullish pennant patterns can be identified automatically with TradingView. Alternatively, you can manually identify it by looking for a sharp price increase (flag pole) followed by a symmetrical triangle price consolidation (flag).

How to measure a bullish pennant pattern?

TradingView can automatically measure a bullish pennant pattern to set a price target. Alternatively, to measure manually, use an arithmetic chart and plot the length of the trend prior to the pennant. This distance will be the future price which you should annotate on the chart in the breakout direction.

Is a bullish pennant a continuation or reversal pattern?

Testing shows that bullish pennants are reversal and continuation patterns. This means the pattern is not predictive, and the price could move in any direction, rendering the potential trade invalid.

What are the best bullish pennant pattern scanners?

The best pennant pattern scanner is TradingView. Every chart you review in TradingView will automatically be scanned for pennants. TradingView also has backtesting and strategy development.

How accurate is a bullish pennant pattern?

Published research demonstrates most bullish pennants fail 45 percent of the time, and even if they succeed, there is only a minimal average price increase of 7 percent. Source: The Encyclopedia of chart patterns

Can a bullish pennant be bearish?

Bullish pennants can be bearish or bullish depending on the direction of the price breakout. But a bullish pennant is such a poor-performing pattern it can be misleading and cause many false breakouts and small losses.

Learn the Success Rates of 65 Chart Patterns Bull Pennant: Why Traders Lose With This Pattern - 15The Encyclopedia of Chart Patterns by Tom Bulkowski details the reliability and success rates of 65 chart patterns and shows you how to trade them. It is an indispensable resource for traders and investors looking to increase their profitability by taking advantage of stock chart patterns. This comprehensive reference book contains in-depth explanations and detailed illustrations of more than 65 different patterns, including Head and Shoulders, Double Tops, Wedges, Flags, Gaps, and more.

Encyclopedia of Chart Patterns by Tom Bulkowski
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