Continuation Patterns: Bull Flags, Ascending Triangles, and Pennants (2023)

If you grew up with a strong penchant for connecting stars and identifying constellations, then you might be naturally “hardwired” for identifying market patterns. If so, you’ve probably noticed how certain patterns and shapessometimes seem to appear. Identifying patterns in the market can be useful, because they can sometimes indicate where and when price may be likely to move.

There are plenty of patterns technical traders see in the markets. We’ll focus on the more common trend continuation patterns—bull flags, pennants, and ascending triangles—and explore what they might be signaling in the markets. We’ll also go over basic setups that make them tradable.

A Caveat for Using Chart Patterns

Some investors like to use chart patterns when analyzing markets. As Connie Hill, education coach at TDAmeritrade, commented, “If we see various stocks behave a certain way during or after a pattern formation, we have an assumption as to what to look for.”

It can also help investors identify “a potential entry, target, and exit if the stock hits the target or if the pattern breaks down,” Hill added. But she also warned that no price pattern is ever guaranteed, and news will trump any technical pattern or signal.

So, keep the following in mind:

• Chart patterns may indicate possible outcomes, but they can’t predict specific outcomes. In other words, chart patterns aren’t tea leaves.
• Chart patterns aren’t always clear. Sometimes they’re a bit bent, misshapen, and hard to identify, which means they can bring uncertainty to the mix.
• Chart patterns can sometimes fail by yielding the opposite of the anticipated outcome. So, be prepared unless you don’t mind rude surprises (and losses).

The cool thing about chart patterns? They can provide you with a bullish or bearish context. You can use them as tactical setups to fine-tune your market entries and exits.

There are many variants to flags, pennants, and ascending triangle chart patterns, but it’s important to start with the basics of these patterns so you can identify them once they begin to form.

The Bullish Flag Leans Against the Trend

“One price pattern that seems to emerge frequently is a bullish flag pattern,” Hill mentioned. You can think of a bullish flag as a pullback thattilts against the direction of the prevailing trend. Two things distinguish a bull flag from other types of pullbacks:

1. Flags have the shape of a rectangular pattern (see figure 1)
2. They’re typically preceded by a price run—a “flagpole”—that can be unusually steep or extended

The traditional expectation for a bullish flag is for the price to break above the flag’s formation (resistance) and continue moving upward. But how low can a flag go? More often than not, a flag will retrace no more than 50% of its previous movement. If a flag retraces 2/3 to 3/4 of the pattern, it’s considered null and void, at which point it’s not a good idea to take an entry based on flag expectations.

• Calculate the distance between the bottom and top of the flagpole
• When price breaks out above the flag’s upper resistance channel, hopefully on high volume, you could use this as a potential entry point for a “long” position
• Consider placing a stop order a few points below the lowest point of the flag channel
• To determine a potential price target, add the distance between the bottom and top of the flagpole to the breakout point

Figure 1 shows an example of a bullish flag trade.

FIGURE 1: IT’S A CLASSIC. This bullish flag played out as expected, which may not always happen. Here you see how, after the breakout from the bullish flag pattern around $15.14, prices moved up to a high of $20.97 before retracing. This is just a little above the bull flag price target of $20.83 ($15.14 + $5.69). Chart source: The thinkorswim® platform from TDAmeritrade. For illustrative purposes only. Past performance does not guarantee future results.

(Video) Tips for Trading the Pennant Chart Pattern

Pennants: A Rare Bird That Can Fly in Any Direction

Pennant patterns are rare, and if you happen to see one, you’ll notice it looks like a symmetrical triangle pattern, but one that can tilt either up, down, or sideways.

There’s a big difference between a pennant and symmetrical triangle: Pennant chart patterns are short term and are preceded by an extended price run (similar to a flagpole). Symmetrical triangles, on the other hand, are often longer-term patterns independent of preceding patterns (hence, no flagpole).

Figure 2 shows an example of a pennant pattern with an upside breakout.

FIGURE 2: WHICH WAY? Price can break out above or below a pennant pattern, so the support and resistance levels of the two sides can act as stop-loss levels when placing trades. Chart source: The thinkorswim platform from TDAmeritrade. For illustrative purposes only. Past performance does not guarantee future results.

Although pennant patterns may lead to upward breakouts, their direction after a breakout doesn’t show any significant bias toward an uptrend or a downtrend. So, keep your stops relatively tight.

• Calculate the distance between the beginning and end of the price swing (lowest to highest)
• Once price breaks out above the pennant’s upper resistance channel, you might consider using this as an entry point for a “long” position
• You could place a stop order 2–3% below a recent low point
• To determine a price target, take the distance between the bottom and top of the flagpole and add it to the breakout point

• Calculate the distance between the beginning and end of the price swing (lowest to highest)
• Once price breaks below the pennant’s support channel, you might consider using this as an entry point for a “short” position
• You could also place a stop loss a few points above the highest point of the pennant’s formation
• To determine a price target, you could take the distance between the bottom and top of the flagpole and subtract it from the breakout point

FIGURE 3: BREAKING OUT FROM AN ASCENDING TRIANGLE. An upside breakout from an ascending triangle could indicate the start of a trend, although you may consider placing a stop order in case price dives back below the horizontal line. Chart source: The thinkorswim platform from TDAmeritrade. For illustrative purposes only. Past performance does not guarantee future results.

(Video) How to Spot the Bull Flag Continuation Pattern 🏯

So, how might you trade an ascending triangle pattern?

• Calculate the distance between the horizontal resistance line at the top of the pattern and the lowest valley of the rising support line
• Wait for the price to break above the upper horizontal line—a potential “long” entry point
• Consider placing a stop order slightly below the horizontal line along the top of the ascending triangle
• Your “take profit” target might vary here: You could add the distance between the top and bottom of the pattern to the breakout point or a price level below that distance to determine a price target

It’s All About the Pattern

Flags, pennants, and ascending triangles might give you a clue as to where a stock or index may be heading. They can “indicate” potential outcomes but can’t “predict” a specific outcome. If anything, they can serve as a “tactical” reference point for potential entries and exits.

Also, these patterns can occur on different time frames. “Price patterns can be either short or long term and can help traders who use different time frames. A trader may also see multiple price patterns within a chart and use them as a guide for expected short-, intermediate-, or long-term moves,” Hill said. Trade them carefully and remember that past performance doesn’t indicate future outcomes.

Although these principles are the foundation of technical analysis, other approaches, including fundamental analysis, may assert very different views. TDAmeritrade does not recommend the use of technical analysis as a sole means of investment research. A stop or stop loss order will not guarantee an execution at or near the activation price. Once activated, they compete with other incoming market orders.