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.
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.
In a bullish flag pattern, the price rises first during the trend but then drops back through the consolidation area.
The price action drops during the trend move in a bearish version and then rises through the consolidation area.
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.
I would prefer to use the majority of candlestick patterns such as the Flag Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Flag Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Flag Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Flag Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.