After a big upward or downward move, buyers or sellers usually pause to catch their breath before taking the pair further in the same direction.
Because of this, the price usually consolidates.
And it forms a tiny symmetrical triangle, which is called a pennant.
While the price is still consolidating, more buyers or sellers usually decide to jump in on the strong move.
This forces the price to bust out of the pennant formation.
A bearish pennant is formed during a steep, almost vertical, downtrend.
After that sharp drop in price, some sellers close their positions.
While this happens other sellers decide to join the trend.
When this happens the price consolidates for a bit.
As soon as enough sellers jump in, the price breaks below the bottom of the pennant and continues to move down.
As you can see, the drop resumed after the price made a breakout to the bottom.
To trade this chart pattern, we’d put a short order at the bottom of the pennant with a stop loss above the pennant.
That way, we’d be out of the trade right away in case the breakdown was a fakeout.
Unlike the other chart patterns wherein the size of the next move is approximately the height of the formation, pennants signal much stronger moves.
Usually, the height of the earlier move (also known as the mast) is used to estimate the size of the breakout move.