How should we trade a Pennant Pattern? Real ExampleToday we have another Academy Post. In this article, we will explain the way we trade pennant patterns on a real setup.
FIRST STEP: Understand the context
-In this case, we have the price inside an ascending channel (that provide us a bullish direction)
-The price is at All-time Highs ( Next Resistance zone, the upper trendline of the channel)
-The price is above a previous Resistance zone (we can deduce Strenght of the price)
SECOND STEP: Creating a Setup
-Now that we have a clear idea about the bullish potential and free path towards the next resistance zone (upper trendline of the channel), we need to develop a setup
-First of all, we need a valid Structure. In this case, a pennant structure to be valid needs an ABCDE formation; the reason is that if we wait for those 5 Waves, we can have a clear idea of the breakout level (The lower and Higher trendline have been tested multiple times, based on that we can set our orders with confidence)
- A setup is composed of 4 items
a) Entry Level: Above B (check the pennant theory)
b) Stop level: Below C
c) Take Profit level: On the 2nd Fibo Extension or in the next resistance zone
d) Break-Even level: First Fibo Extension.
-Only trade if your Risk Reward ratio is above 1.5 ( that means that for every dollar you are risking, you expect to make 1.5)
THIRD STEP: Define your Risk and Follow your rules.
-Only use 1% of your capital on any given trade. That way, you will protect the most important thing as a trader. Your money and your mind
-Follow your rules: The reason you want to have a clear Stop, Take profit, entry, and Break-Even is to act only if the price reaches one of those. otherways, DO NOT TOUCH ANYTHING
-Accept that Stop losses are part of any system: You don't need "90% accuracy"; you need to be right half of the time and a risk-reward ratio above 1.5 to be profitable.
Trade Safe, Thanks for reading!
