Trading Flags and Pennants These patterns could be early bystanders of the appearance of a reversal in trend, and warn us that this new trend has many chances for continuation. Look at chart #2 the first pennant was very tight and indicates very shallow retracement. The pennant appears after a strong up candle that was an initial thrust candle after a bear trend. This combination gives us a first clue that possibly the shift in market momentum has really happened. Since flags and pennants are rather tight, short-term and small consolidation, the major approach to their trading is to open positions in direction of the trend inside the flag/pennant and place stop loss order at opposite border of the pattern. You can see it on chart #2. Say, we couldn’t enter on he first pennant, because weren’t sure that this is really reversal, but now we want to enter using the flag. We should buy somewhere inside the flag and place our stop below the lower border. Some traders enter the market when it gives confirmation of breakout of the pattern. But since flags and pennants are companions of strong trends, using such kind of entry could lead to you will miss a good trade, because when the breakout will be confirmed, the market could show a significant move up. Also your risk will be greater, since your stop loss order will be farther.