The pennant pattern is a great pattern to trade with binary options. The pennant pattern allows for relatively exact predictions about future price movements, and is therefore one of the preferred patterns by many successful traders. If you want to improve your trading, learning how to recognize and trade a pennant patter can help you greatly.
Most of the time, a pennant occurs after a steep bullish or bearish trend. Prices have moved far over the last periods, and at least for now the momentum is gone. In a situation like this, prices cannot rise any further, but cannot fall either, because there is no momentum in the opposite direction. The market will therefore enter a period of consolidation, in which it will generate new momentum to continue the previous trend.
Often, this consolidation occurs on a continuously narrowing trading range, which is the most significant characteristic of a pennant pattern. Defining the upper and lower resistance level of this trading range will create a pennant like pattern of two lines moving towards each other.
The pennant pattern is a continuation pattern. When the pennant is completed, prices are likely to break out to continue the previous trend. Most of the time, prices will wait until both lines almost touch each other to break out of the pennant.
As you can see in the picture below, prices will sometimes move outside of the pennant’s trading range before it is completed. More than likely, these are false signals you can ignore, especially when they occur in the opposite direction of the previous trend.
How to trade the pennant pattern with binary options
For trading, the pennant pattern is very similar to the flag pattern. As technical analysts have found, the pennant usually waves at half mast. This means, after the pennant is completed, you can expect prices to continue moving in their previous direction for roughly the same distance and at roughly the same rate as before the pennant. You can trade this prediction with a touch option. Make sure to use a target price within the reach of the movement and a suitable expiration time.
Still, compared to the flag the pennant has some distinct differences:
First of all, the pennant’s two approaching lines allow for a relatively safe prediction on when the pennant will end: The pennant cannot go once both lines meet. The flag, however, is formed by two parallel lines, which means, at least in theory, it can go on forever.
Therefore, the pennant grants a trader an amount of certainty a flag cannot create. You can use this certainty to make predictions you can trade. For example, once the pennant is close to being completed, you can invest in a High / Low option in direction of the previous price movement. Also, you can invest in a no touch option more securely while the pennant is created, since you can determine how long prices will still need to complete the pennant. If you prefer a risky strategy, you can even trade the pennant with a Boundary option.
Of course, a pennant also allows you to trade the same strategies you can use with any continuation formation. You can invest in a High / Low option once the pattern is completed to use strong price movement created by this event.
Trading a pennant can create uniquely detailed predictions about future price movements. Combined with a little experience in recognizing and trading pennants, these signals can help you win a lot of your trades and still get a good payout for each single trade. Compared to simple candlestick formations, pennants are rare, though. Therefore, you may have to combine a number of different time frames and assets to find enough trading opportunities.