One of the easiest and most reliable ways to trade forex is through a technical analysis method called triangles and pennants. They are easy to spot and work on all time frames.
Let’s start by drawing a rising trend line. Some traders like to draw their trend lines on the lows (the bottom of each candle’s wick) or on the close of each candle.
In this case, this entirely your preference. If you like you can draw both. So, we have an upward bullish trend. or do we?
If we do the same to the highs of each candle, or the close of each candle, we have a downward bearish trend. Obviously, we can’t have both so we end up with a pennant.
The pennant is a consolidation pattern which represents a battle between buyers and sellers with price compressing like a heavy spring. …and just like the spring, at some point the pressure is too much and either buyers or sellers win the battle. In a couple of minutes we will show you how to use News Sentiment to take advantage of this.
Note what happened at the point of the pennant. Price broke through the lower trend line and the price of gold dropped by $50 over the next 3 1/2 days. A nice trade if you were paying attention!
If we zoom out and look at the Daily chart on gold we see an important characteristic of a pennant. It exited in the same direction that it entered. So, to sum up: the pennant was just a consolidation period in the middle of a long bearish trend. This is not always the case so you need to apply normal risk management, as always.
Sometimes they may be a little harder to spot like this one on the hourly chart on Gold. The first clue is the rising trend line in a bearish market. The upper trend line can be drawn in a couple of places but we can still see the lower highs and an obvious pennant.
Zooming out to the 4 hour chart we can see that this, as well, was a continuation of a bearish trend. The Bearish trend ended at this line of support.
Another form of this is called the descending triangle. The main difference is this line of support. We still have lower highs and a compression of price action, and a battle between sellers and buyers. In this case the line of support is quite well defined and price attempted to break lower 4 times. Finally on the 5th attempt price action broke through support.
An important thing to note though is that price could break through support or just as easily break through the upper trend line.
On the contrary, here is an ascending triangle on the One hour Chart for Palladium. Price tried to break through 5 times and finally gave up.
Here is a case on EURGBP where we could consider this to be a ascending triangle or a pennant. Either way we should prepare for a healthy breakout.
At the end of this bear run we saw a reversal and the beginning of a bull run. This candle represents a News Event where the Bank of England governor was, let’s say, pessimistic, sending the pound weaker. An attempted reversal by sellers resulted in this pattern…the Falling Wedge. This pattern is almost always a continuation pattern and in this case the bullish run continued.
So, to summarise, we have:
1. Bullish Pennants
2. Bearish Pennants
3. Descending Triangles
4. Ascending Triangles
5. Descending Triangles
6. Falling Wedges
7. Rising Wedges
We found this pennant on the S&P 500. By the end of close it had just bounced off the upper trend line. In this case we used the Acuity Trading Radial Gauge to confirm the latest News Sentiment and found it to be neutral, really not giving us a definite indication.
The next day, just before the New York open, we checked again and found that News sentiment had shifted overnight. We were confident going short and, in fact, the market crashed over the next three days!
In this case, there was no trend continuation to consider as the S&P was coming off its highest points of all time.
As these pennants can be spotted on any time frame, they may take hours, days or even weeks to form. Using the Acuity Trading Radial or Linear Gauges to time your entry can be very advantageous.
As we have shown, Acuity Trading’s Market Alerts often pick up quick changes in News Sentiment driven by technical opportunities.
Here is an example of a Daily Market Alert where we picked up a Bullish Alert on Palladium right near the end of falling wedge. A Bullish Radial Gauge provided an extra confirmation and the wedge proved to be a continuation pattern as the Bullish run continued.
On EURUSD a Bullish Daily Market Alert let us know about a Pennant forming and the indications were that price would rise within 4 days. The Bullish run continued with a breakout from the pennant and price hit a key level of resistance within 2 days.
1. Use Acuity Trading’s Radial and Linear Gauges to time your entry and determine direction when trading Pennants and Triangles
2. Use Acuity Trading’s market Alerts to alert you to possible technical opportunities including Pennants and Triangles.