PENNANTS

Continuation patterns abound, and pennants represent yet another one of them. Like triangles and flags, pennants indicate that the prevailing trend, up or down, is likely to continue. Thus, binary option traders who see a pennant should position themselves with options that will be in the money when the previous trend resumes.

Pennants are often confused with flags, triangles, and wedges. They differ from flags and triangles in that the price action in a pennant is contained within two converging trendlines, neither of which is perfectly horizontal. Recall that the trendlines of a flag are parallel, and each type of triangle contains at least one trendline that is perfectly horizontal. Pennants differ from wedges in that they are continuation patterns, whereas wedges are reversal patterns. Also unlike a wedge, which slopes in a particular direction, the overall direction of the price action in a pennant is horizontal even though the trendlines converge.

A pennant is in fact a price channel that gets continually narrower. Like a price channel, it is a consolidation pattern that tends to occur as traders rest. The signal to trade on a pennant pattern comes when price breaks out of the converging trendlines in the direction of the prevailing trend and is accompanied by a spike in volume.

Binary option traders looking to profit from pennant patterns should buy Call-style options when a pennant has formed during an uptrend, and a breakout with volume occurs to the upside. Similarly, they should buy Put-style options when a pennant has formed during a downtrend, and a breakout with volume occurs to the downside. It is possible to use the converging trendlines to design profitable range-style trades that reward traders when price stays confined to a certain range. Traders who do that just need to be ready to reverse their positions quickly in the event of a breakout.