Pennant Strategy: what you should know before you start trading
Figures of technical analysis for several decades have been helping the traders to forecast the right price movement in the future correctly. This versatile instrument is widely used in literally every financial market. The market of binary options makes no exception. Today, we will consider such figure as “Pennant“, as well as its formation on the chart that will help us to trade.
To begin with, it should be noted that the figure Pennant is considered to be a continuation of the trend pattern and is usually formed on the graph at the time of short-term price consolidation, after a significant trend movement. When a consolidation or price pullback is over, the price again continues moving with the trend.
The best thing is to search the figure of pennant on intraday trend on the charts right down to thirty minute. This fact doesn’t mean that such figure cannot be formed on the longer time frames, but if you want to make a profit with intraday trading, it is necessary to monitor the timeframes closely.
It may be noted that at a glance such figure looks like a “symmetrical triangle”. But its main difference from the mentioned figure lies in the fact that “Pennant” forms much faster. Besides, this trend continuation pattern’s compulsory component is a “flagpole”, i.e., a sharp, close to vertical, price movement on the trend. If such movement is observed, we can prepare for Pennant formation on the chart.
Flag and Pennant formations on GBP/USD chart
Entry points to the option to purchase:
We prepare for the purchase of Call option after a sharp price movement in terms of a session. It happens mostly in pre-prandial period in European session, either in pre-prandial time in the US trading session, which is the European afternoon. When a sharp price movement takes place, for 2-3 hours there is a small correction and the market girds up loins to continue the movement in the selected direction. After the flagpole formation, we observe the emerging resistance and support lines, which should converge. After breaking and price fixing above the resistance line we enter the market with the option Call.
Entry points for the option to be sold:
We are closely watching the market for the Put option at 07.00 to 11.00 and at 13.00 to 17.00 GMT – the time of active work of European markets and also the first half of the US session. If a sharp downward movement forms the flagpole at this moment, we expect the Pennant to occur and prepare to enter the market. Transactions are concluded after breaking down the support line and fixing it (at least, the candle should close below this line).
Often, traders using this strategy trade classic options, forecasting the price to leave towards breaking the formed trend continuation patterns. One-Touch and Out-Range options, exposed to levels above the support line at Call, or below the support line at Put, also show good profitability. At the same time, for Out-Range option it is reasonable to set a small range of 15-20 points. But it is not very profitable to apply One-Touch options for this strategy, because there is no developed technique as for the points the price will take after breaking the Pennant.
Since the figure of Pennant does not occur on the chart as often as the traders would like it to, the signals that it gives are quite profitable.
Testing the stories on three currency pairs over the past six months have shown that the figure assumes up to 75% profitable signals, thus, for three profitable transactions there is only one unprofitable. But as the strategy gives a few signals to enter the market, its single use in trading will not bring big profit, and it will be better to use it as one of the several strategies for trading.
Given the fact that the strategy refers to intraday, to improve the reliability of the profit, the best variant of the option expiration is the end of the day – 0.00 GMT. Although pays fairly well its way the expiration term, which is equal to the timeframe in which the graphical signal of Pennant multiplied by four is detected. That is, if it is the hourly chart – 4 hours, if 15 minutes chart – an hour, etc.
A trader can use a method of expiration establishing by the end of the next trading session, in which the breakout of the figure happened. So, if the breakout happened in the last half of European trading session, the expiration date should be set for 17-18 pm GMT. If the breakout has occurred in the second half of the US trading session, then again, we go back to 0.00 GMT, i.e., day closing.
- One of the most profitable strategies
- About 75% of profit-making signals
- The formation of Pennant happens fast (thus Pennant is perfect for intraday trading). The best thing is to look for Pennant on the intraday trend
- The formation of Pennant is not as common as one expects
- The strategy gives only a few signals for the market entry, so it is better to match two or more strategies to be sure and to trade successfully
- It doesn’t match One Touch options
That’s all for now. Got any questions? Just ask the expert!