What Is The Flag Chart Pattern & How To Trade With It

Flag Chart Pattern

The Flag pattern is used as an entry point for the continuation of a prevailing trend.

The Flag is a price pattern that moves from a shorter timeframe to counter the price trend in a longer timeframe.

The pattern got its name “Flag,” as its structure looks similar to the Flag on a flagpole.

What is the Flag chart pattern?

The flag pattern identifies the possible continuation of a preceding trend from a previous point against the same direction.

Generally, Flags are areas of tight consolidation in price action. It shows that a counter-trend move after a sharp price fluctuation.

The pattern compromises between five and 25 bars.

A keynote to add is that the FlagFlag’s bottom should not cross the Flagpole’s midpoint that forms after the pattern.

Flag chart pattern
Flag chart pattern

To identify the pattern, a trader should look for the following points:

  • The previous trend
  • Area of consolidation
  • The volume of the current trend
  • Confirmation of a price move in the direction of the breakout

The Flag pattern also contains parallel trend lines over the consolidation region. When these lines converge, the pattern forms into the wedge or pennant pattern.

These patterns are considered one of the most reliable continuation patterns, as they pinpoint an exact entry and exit points in a current trend.

How to use the Flag chart pattern?

Flag patterns have two variations: the bullish Flag and bearish Flag.

Bullish Flag

In a bullish flag pattern, the price rises first during the trend but then drops back through the consolidation area.

Bullish Flag
Bullish Flag

Bearish Flag

The price action drops during the trend move in a bearish version and then rises through the consolidation area.

Bearish Flag
Bearish Flag

To trade the bullish and bearish Flag patterns, traders would usually wait for the breakout to help try and avoid any false signals.

To enter the trade, traders could look to take long positions after the price closed above the upper trend line. On the other hand, in a bearish pattern, traders may look to take short positions after the price closed below the lower trend line.

Traders could choose to use the opposite side of the Flag pattern as a stop-loss point. For example, in EUR/USD, if the pattern’s upper trend line is at $1.1845, and the lower trend line of the pattern is showing $1.1841, then to place a stop-loss, traders would mark $1.1841. This is when the traders are taking long positions. If the trader is taking short positions, he/she needs could place a stop-loss closer to the upper trend line. It depends on the individual traders and their money management.

Although the Flag pattern is often reliable, however, it is prone to false signals. Therefore, the pattern should be used in conjunction with other technical indicators.

Flag chart pattern trading strategy

The Flag chart can surface on both short-term and long-term timeframes. Therefore, traders can take full advantage of the Flags.

The key thing to remember is the volume and trader’s position choices.

Flag chart pattern buy strategy

  • Locate the Flag pattern with the increasing volume.
  • Wait for the price bar to go bullish before entering.
  • Enter the trade after the consolidation area.
  • Set a stop-loss close to the lower trend line.
  • Exit the trade on high.

Flag chart pattern sell strategy

  • Locate the Flag pattern with the decreasing volume.
  • Wait for the price bar to go bearish before entering.
  • Enter the trade after the consolidation area.
  • Set a stop-loss close to the higher trend line.
  • Exit the trade on low.

Flag chart pattern conclusion

The Flag chart pattern is a continuation pattern. To fully benefit from the pattern, traders can remember increasing/decreasing volume, and to combine the pattern with other forms of technical analysis.

The Flag Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy.