T2W Trading Community

Trend analysis is a complex process that goes beyond trend lines, channel lines and retracements.   An important aspect of this type of analysis is the identification of patterns that reinforce trends and of formations that signal the reversal of trends. 

Chart formations that show the extension of trends are called continuation patterns. They consist of pauses within trends and they are generated by traders who realize some or all of their profit typically ahead of significant releases of economic data or strong technical level. These behavioral patterns translate into chart formations and tend to look like neutral moves.  However, they can either slope against the original trend or, more rarely, slope in the direction of the trend. The consolidations are fairly short – but not always.

The most important continuation patterns are: flags, pennants, triangles and wedges.  Let’s focus on triangles.

Differences between a Pennant and a Triangle

A pennant is trend continuation formation which consists of a trend, also known as the pennant pole, a consolidation formation, which resembles a triangle, and of a breakout in the same direction of the original trend (see Figure 1).  Back testing shows that the breakout is similar in size to the amplitude of the original trend.  While lack of volume continues to haunt FX traders, it is easy to see that volume decreases steadily as the consolidation phase of the pennant is unfolding.  This raises the issue of the direction of the breakout; while a bull pennant is supposed to break upward and a bear pennant to continue downward, the consolidation shows clearly the dwindling trading interest, and this warns of possible fake breakouts.

Figure 1.  Diagram of a pennant.

Triangles can be envisioned simply as pennants with no poles (see Figure 2).  This means that you will have price objectives smaller than the pennants’.

Figure 2.  Diagram of a triangle.