Many long-term crypto holder (or HODLer) believes the prices of their favorite digital assets are on course for a lunar landing, but predicting when the rocket ship launches isn't easy. Due to the crypto market's volatile price action, some traders might feel safer taking a hands-off HODL approach and waiting for their digital assets to soar.
However, short-term crypto traders often use techniques and tools to calculate the odds of an imminent price breakout. Technical chart patterns like the bullish pennant are some of the most widely watched-for indicators to give traders an edge before jumping into digital assets.
Although bullish pennants are often interpreted as optimistic omens, traders should keep in mind a few considerations when they find this pattern. Let’s explore the details of bullish pennants, how to find them, and what can be done when they appear.
What is a bullish pennant pattern in crypto?
Bullish pennants are patterns on cryptocurrency price charts that resemble triangular pennant flags. But before entering this triangular formation, a cryptocurrency posts a price surge with a long green candlestick called the flagpole.
In a bullish pennant formation, a digital asset’s market price bounces between an upper and lower trend line, both forming the pennant shape and narrowing as they meet at the apex.
These pennants are considered bullish, so the bias for future price action is to the upside.
Crypto traders might expect the crypto asset's price to increase after it reaches the final point in the bullish pennant pattern. Because the consensus is that bullish pennants will continue the same trajectory as the green flagpole, they fit a category of technical indicators called continuation patterns.
Essential features of a bullish pennant flag
In terms of the bullish pennant flag's shape, traders often look for two features on charts. First, there should be a substantial move to the upside to form the pennant's flagpole. After the volatility of the flagpole fades, traders often want to see prices bounce between upper and lower trend lines resembling the distinctive pennant triangle shape.
In addition to looking for the flagpole and pennant shape on a cryptocurrency's price chart, traders carefully monitor daily trading activity using the volume bar charts. Traditionally, bullish pennant patterns have higher-than-average volume during the flagpole phase and at the end of the pennant formation. Within the pennant formation, volume levels tend to taper back as prices bounce within the triangle and traders await the next big move.
How to trade bullish pennants: A few strategies
The most straightforward way traders typically use bullish pennant patterns is to set up a momentum trade to the upside. Once a crypto trader sees a bullish pennant in the making, they keep a close eye on whether the support and resistance levels hold as the pennant inches closer to the endpoint. As long as there aren't any breaks in the trend lines and volume levels increase near the end of the pattern, traders typically enter a long position at the apex of the pennant to profit from the breakout.
Sometimes, traders measure the width between the lowest and highest point in the pennant to guess the size of the bullish breakout and set their price targets. For example, if the lowest price for Bitcoin (BTC) in a pennant formation is $45,000 and the highest point is $46,000, a trader sets their expected gains $1,000 above the price where BTC closes at the pennant's end.
Traders often use bullish pennants to profit from upward price action, but they may also rely on other ways to incorporate these patterns into their strategy. For example, if a cryptocurrency’s price falls below a pennant's lower trend line, traders sometimes open positions to profit from price declines [e.g., short perpetuals, put options, or inverse exchange-traded funds (ETFs)].
Alternatively, traders interested in range trading, algorithmic trading, or scalping microtrends might use the tight channel in a pennant pattern to set high and low price targets and attempt to profit from quick trades.
Are bullish pennants the same as bull flags?
Bull flags and bullish pennants are continuation patterns that share an upward bias, but they don't have the same shape on price charts. For example, both patterns have a green flagpole candlestick, but the consolidation phase for a bull flag looks like a downsloping rectangle.
Like pennants, the prices in a bull flag bounce from upper and lower trend lines on subdued volume, but the flag's horizontal trend lines don't meet at one point. If the bull flag pattern plays out as expected, prices eventually break out of this box to the upside on higher-than-average volume.
Bullish pennants versus bearish pennants: Key differences
Bearish pennants are another continuation pattern similar to bullish pennants, but the former has a bias to the downside. The significant difference between bullish and bearish pennants is the latter starts with steep price declines, which forms a red flagpole rather than a green candlestick.
After the high volume from this initial sell pressure cools, the bearish pennant forms the same triangular formation associated with bullish pennants, but traders expect the price to fall further once this pattern reaches its apex.
Bearish pennants are closely associated with price declines, so traders often open short positions or buy put options to profit from price depreciation or hedge long crypto positions.
Bullish pennants versus symmetrical triangles: What’s the difference?
Both bullish pennants and symmetrical triangles are continuation patterns in technical analysis, but they have distinct features and implications.
As mentioned, a bullish pennant forms after a flagpole, followed by a consolidation that creates a small symmetrical triangle resembling a pennant. This pattern usually develops quickly, over a few weeks, with volume decreasing during formation and increasing at the breakout, which typically occurs upwards, in line with the previous trend.
A symmetrical triangle, on the other hand, is characterized by two converging trend lines with similar slopes, indicating a period of uncertainty where the highs and lows converge. This pattern takes longer to form––often over several months. The volume decreases as the triangle develops, with an increase at the breakout point.
Unlike the bullish pennant, the breakout direction in a symmetrical triangle can be upward or downward, although it often follows the direction of the prevailing trend.
Risks of trading bullish pennant patterns
Bullish pennant patterns seem like a useful tool to create upside, but there's always the risk of false breakouts when trading technical chart patterns. No matter how perfectly a bullish pennant looks on a cryptocurrency's chart, there's a chance a black swan event like a hack or bad economic data invalidates a bullish pennant pattern and suddenly plunges the crypto market.
Also, since bullish pennants aren't the most challenging pattern to spot on trading charts, they often attract more traders than usual to enter long positions (aka a crowded trade). In some cases, crowded trades play out as expected and lead to heightened upward momentum, but they also increase the risk for significant volatility—especially if traders panic sell when there's unexpected bad news or the bottom trend line doesn't hold.
To avoid the inherent risks of trading bullish pennant flags, traders often set stop-loss orders when entering a position. Whether traders prefer market or limit orders, stop-losses automatically sell a losing trade at a predefined price level. These orders guarantee that traders will only lose a predefined amount on a position, which helps them manage risk if a trade doesn't work in their favor.
Also, instead of relying on bullish pennants in isolation, traders incorporate this pattern into a comprehensive crypto market analysis. Consider how pennants relate to other technical indicators and fundamental news on a cryptocurrency before deciding how to approach these opportunities.
Generally, the more bullish data points there are on a crypto asset—such as a golden cross, an upcoming network update, or back-to-back bullish pennant patterns—the more confident traders can feel entering long positions when this pennant appears. Conversely, if there's no further evidence to support the "bullishness" of a bullish pennant, traders exercise greater caution before entering the market.
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