Understanding the pennant flag pattern: How to identify and use it

Learn how to use the pennant flag pattern, a continuation pattern for bearish and bullish markets. Find the trend, watch for consolidation, and enter past the breakout—here’s how to trade pennants.

The pennant flag pattern is a common pattern used in technical analysis. This continuation pattern is defined by a significant price movement, followed by a consolidation period and a breakout that moves in the same direction as the first movement.

Often used in combination with various other technical analysis tools, the pennant flag pattern can indicate a trend continuation. However, like any tool, it has limitations and risks. In this guide, we’ll explore how this pattern forms and how to use it effectively.

What is the pennant flag pattern?

Pennant patterns form after the price rallies or drops, creating a sharp uptrend or downtrend. This forms the “flagpole” part of the pattern. It then enters a consolidation period—the converging lines that form the “pennant”—before passing the breakout line and continuing its original path.

The basics of chart patterns

Over the course of a given trading period, the price will rise, consolidate, stagnate, and fall. In doing so, it forms familiar patterns which traders can use to judge market sentiment, draw support and resistance lines, and predict whether the price will break up or down.

In trading, nothing is concrete, but chart patterns provide traders with a reliable structure in an unpredictable environment. They are also self-confirming, as many traders use them and look out for them. When certain patterns are confirmed, traders act in a specific way, and this drives the market in a reasonably predictable direction.

How the pennant differs from other flag patterns

Flag and pennant patterns look similar and can be confused with one another, but there are key differences.

Both patterns have “flagpoles” that show a sharp rise or fall. The pennant then forms converging lines during a consolidation phase before continuing. The flag pattern, however, forms a rectangular shape during its consolidation, which is where the so-called “flag” comes into play. 

The easiest way to tell them apart is to check during the consolidation phase. Look for sloping lines indicating pennants or two parallel trend lines indicating flags.

Bullish vs bearish pennants explained

A bullish pennant is one that trends upwards, consolidates, and then continues. A bearish pattern trends downwards before consolidating and continuing. They form the same patterns, but in opposite directions.

How to identify a pennant flag pattern on a chart

The flagpole and pennant aren’t the only indicators of a pennant flag pattern. Volume is also key.

Key characteristics of a pennant pattern

Whether it’s bullish or bearish, there are four characteristics of the pennant pattern:

• The flagpole: The price of an asset experiences a sharp movement, either upwards for bullish or downwards for bearish. The ascending/descending lines drawn on price lows and highs form an ascending/descending rectangle that looks like a flagpole.
• The consolidation: The market enters a period of uncertainty and consolidation, moving sideways. Volume drops, and the high/low lines form a thicker shape.
• The pennant: Consolidation continues. The lines above the highs and lows converge to a point, getting smaller as the consolidation waits to break.
• Breakout: The breakout occurs above the tip of the flagpole and moves in the same direction as the flagpole.

Volume trends during pennant formation

The market contracts during consolidation, decreasing in volume. When the breakout occurs, it does so with a significant trading volume spike, showing that there is strong support. The higher the volume, the more likely the pattern is to continue on its trendline.

Low trading volume indicates that the pattern may fail—this is not a true pennant flag. It may break, but it is unlikely to hold.

Traders can use simple volume metrics, such as a volume indicator or volume candles, to determine if it’s a true pennant flag.

Timeframe and market context considerations

Looking at longer timeframes gives traders some context. They can see the bigger picture and determine, for instance, if a pattern that forms on a 15-minute chart is part of a larger trend on a 4-hour chart.

Typically, true pennant flag patterns form over longer time frames. The consolidation period may last for several weeks as market uncertainty fluctuates, gradually dipping into a converging line that’s primed for a breakout.

The psychology behind the pennant flag pattern

Understanding market psychology is key to learning how the pennant flag pattern works.

(H3) What buyers and sellers are doing during consolidation

As more buyers enter the market, they push the price upward. Markets then enter a bullish phase, and enthusiasm is high. The longer this trend continues, the more likely it is that those buyers will exit the market and take their profits. Once big traders cash out, the trend slows, and buyers panic.

Once the flagpole has reached its apex, the pattern enters the pennant and its consolidation phase. At this point, bulls and bears are in direct competition, and the market is uncertain. However, the bulls eventually win, the price pushes past the breakout line, and enthusiasm reaches a high once more.

The opposite is true for bearish patterns.

Why the breakout direction matters

The breakout confirms the pattern and suggests a trend continuation. Traders will typically wait for this moment, as it means there is a strong chance the price will keep moving.

How to trade using the pennant flag pattern

It’s easy to look at a fully formed pennant flag pattern and judge the best time to enter/exit, but it’s trickier to make those decisions when you’re watching the pattern form.

The first step is to identify the pattern before the breakout. Look for the uptrend/downtrend flagpole followed by the consolidation pennant. 

Entry points: When to act on a breakout

Draw lines over the highs and lows in the consolidation period. These lines should gradually converge, creating a breakout in line with the tip of the flagpole.

In a bullish pennant flag pattern, traders watch for the price to break this line before entering. They may place a limit buy order at this line, automatically entering past the breakout.

Stop loss placement and risk management

A stop loss order mitigates risk by exiting the market when the trend reverses. A common strategy is to place a stop loss below the peak of the lower trendline.

Setting profit targets and measuring moves

There are several strategies for exiting or setting take profit orders:

• Flagpole height: Assuming the movement will mirror the initial flagpole, profit is taken when the breakout line matches the initial trend.
• Half the flagpole: Exits occur when the breakout line reaches half the size of the flagpole.
• The pennant height: Measure the high and low points in the pennant and use them to define your profit target.

Common mistakes to avoid when trading pennants

• Relying only on the pattern: As with most patterns, the flag pennant is best used in combination with other indicators. 
• Ignoring volume: Low volume during the formation of the pennant may lead to a failed pattern. 
• Wrong entry points: Entering at the wrong time could cost you your trade. For bullish patterns, traders will typically enter above the upper trendline, past the breakout. For bearish patterns, they enter below the lower trendline.
• Plan ahead: You should always have an exit strategy before entering a trade. Novice traders may be better off using conservative stop loss and take profit orders to protect their capital.

Examples of pennant flag patterns in real markets

To understand how these patterns form in certain markets, let’s consider the following examples.

Bullish pennant example: Stock or crypto chart

Let’s assume you’re looking at a stock chart in a bullish period. The stock moves from 10 USD to 20 USD in a sharp uptrend, indicating that market sentiment is positive and there is strong support.

The price then consolidates, entering a period of uncertainty that lasts for several weeks. The highs and lows create converging lines that form a pennant and eventually settle on a consolidated price of 17 USD.

The price then breaks out at 19 USD, which is backed by increasing volume.

A trader can enter the market at this point and set a target consisting of the initial price combined with the breakout, giving us a profit target of 24 USD. A stop loss can then be set at the lowest point of the pennant, as a breakdown to these levels indicates that the pattern has failed. 

Bearish pennant example: Forex, crypto, or index chart

With a bearish pattern, the aim is to go short and profit from a downtrend. If ethereum moves from 2,500 USD to 2,000 USD, consolidates at 2,200 USD, and breaks at 2,100 USD, traders can short at the point of breakout. They can then set a target below the breakout and the height of the initial trend, placing it somewhere between 1,500 USD and 2,000 USD. A stop loss above the breakout will mitigate some of the risk.

Lessons learned from historical patterns

The best way to understand how the pennant flag pattern works is to look for historical patterns. Check the charts for your chosen asset and search for the patterns. 

With historic data, you have the full trajectory of the trendlines and can see how the pattern formed and where the price went. You can use these patterns to draw breakout lines and determine the most realistic placement for take profit and stop loss orders.

Keep in mind that while it’s easy to find and judge patterns in historical charts, it’s a different thing to watch them form and act accordingly. Novice traders should consider starting with a demo account and moving across various assets and timeframes to get a better feel for how patterns work.

Pennant vs other continuation patterns

As with pennant patterns, triangles, flags, and rectangles are all continuation patterns, indicating that the market will continue to move on its current trendline, albeit with a brief consolidation period.

Comparing pennants with flags and triangles

A pennant flag pattern forms in markets with high momentum, and they have relatively short consolidation periods. Unlike triangles, which can indicate neutrality in the form of symmetrical triangles, pennants are nearly always continuation patterns by nature. Flags are very similar but lack the converging lines and don’t move as sharply when the price breaks.

When to favor one pattern over another

Use a pattern that aligns with the current market trend, such as a bearish pennant in a bear market and a bullish pennant in a bull market. Make sure the market is actually forming a pattern and you’re not trying to force it. If the lines aren’t there and the volume doesn’t match, the pattern is more likely to fail.

Strengths and limitations of the pattern

Pennant patterns only account for market movement and don’t consider other factors that could influence the price, such as economic news and geopolitical events. Patterns may form and then fail due to these external factors.

As a continuation pattern, the pennant flag can be a good way to determine bullish or bearish sentiment. Assuming the trader enters at the right time—after the breakout and not in anticipation of the breakout—they can set and reach their profits. 

Best practices for incorporating the pennant flag pattern into a trading strategy

The pennant flag pattern should be confirmed with trading volume, broader timeframes, and market conditions. It’s a useful tool in a trader’s arsenal, but it’s not the only one, and is best used in combination with other indicators and a holistic approach.

Key takeaways

1. The pennant chart pattern is a continuation signal. It appears after a sharp price movement and typically signals that the trend will continue in the same direction after a brief consolidation.
2. Trend lines are essential to spotting a pennant pattern. The pattern forms as two converging trend lines develop during a sideways market phase, often with declining volume before a breakout.
3. The pennant pattern must be confirmed with volume and context. Use trading volume, timeframes, and other technical analysis tools to verify that a true pennant is forming before entering a trade.
4. Pennant chart patterns can be bullish or bearish. A bullish pennant breaks upward and a bearish one downward, both continuing the direction of the initial price movement.
5. Flags and pennants look alike but behave differently. While both are continuation patterns, flags have parallel trend lines, whereas pennants have converging lines that form a triangle.
6. Risk management is critical when trading pennants. Place stop loss orders below the pennant's base and use the height of the flagpole to set realistic profit targets.
7. Breakout direction confirms the trade opportunity. After the consolidation ends, a breakout in the original trend direction—supported by volume—signals a stronger, more reliable trade setup.

Final thoughts: Is the pennant flag pattern reliable?

The pennant flag pattern is one of the most reliable continuation patterns in technical analysis, especially when confirmed with volume, clear trend lines, and broader market context. It offers traders a structured way to spot potential price movement in both bullish and bearish markets and act accordingly.

However, like all chart patterns, its success depends on how well it's identified and timed. False signals can occur, particularly in low-volume environments or when traders misread consolidation phases. That’s why it's important to pair the pennant with other indicators and always have a risk management strategy in place.

With practice, observation, and discipline, the pennant flag pattern can become a powerful part of your trading strategy—providing clean entries, well-defined exits, and a clearer sense of direction in volatile markets.

Ready to spot your first breakout? Whether you’re trading crypto, stocks, or forex, mastering the pennant chart pattern can give you a serious edge. Start practicing on live or demo charts today—and turn pattern recognition into real trading confidence.