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. Flag patterns can be either upward trending (bullish flag) or downward trending (bearish flag). The bottom of the flag should not exceed the midpoint of the flagpole that preceded it.
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.
It is an area of consolidation which shows a counter-trend move that follows after a sharp price movement. 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?
A flag chart pattern is formed when the market consolidates in a narrow range after a sharp move. Usually a breakout from the flag is in the form of continuation of the prior trend. 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.
Bearish Flag
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.
A Flag pattern is a weak pullback of an existing trend, usually shown in a form of small-bodied candles. The best time to trade the flag pattern is after the breakout or during a strong trending market. And to trade a flag pattern you can enter when the market break above the highs with stop loss one ATR below the low.
The flag portion of the pattern must run between parallel lines and can either be slanted up, down, or even sideways. A forex trader may look to enter a trade when the prices break above or below the upper or lower trendline of the flag.
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 pattern occurs when a sharply trending price suddenly pauses and retraces slightly in a rectangular range. It then breaks that range and continues in the original direction, giving you the opportunity to enter the second half of a trend at a better price than before the flag formed.
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 forex trading strategy.
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