Continuation Patterns: Flags

A flag is another continuation chart pattern. It can be bullish or bearish, depending on what kind of move was before the pattern formed. If the move was down you would expect a bearish flag and if it was up you would wait a flag to be bullish. Technical analysts argue about the length of time that would validate the pattern, but most would agree that it could be from a couple of days, to a couple of months.

Key components of a flag

A flag pattern should have a sharp move that precedes consolidation or a range. This strong move forms a shape of a flagpole, which distance has to be measured from the area where the move started to the point where the move stalled. After the move is over and price starts ranging it forms a rectangular sloping channel that does look like a flag. If previous move was up, the sloping channel should be down. If previous move was down, the sloping channel should be up. If you draw the trend lines through the highest and the lowest points of the pattern you will be able to see the shape of a flag clearly.

How to trade a flag

Sooner or later a breakout occurs and in most cases a bullish flag is broken upwards through the trend line of the upper channel and a bearish flag is broken downwards through the trend line of the lower channel.

So, if you spotted a bullish triangle and expect a break up, you need to place a buy stop order a few pips above the upper trend line and with a stop loss a few pips below the most recent support. In most cases that would be around 50 pips. If you defined that a flag is bearish you have to place a sell stop order a few pips below the lower trend line of the pattern with a stop loss order a few pips above the most recent resistance (usually some 50 pips).

An easy way to calculate your take profit target is to measure the size of a flagpole and add that amount of pips to the breakout point (up or down depending which direction price breaks).

Below is the example of a bearish flag that formed in eur/usd pair when it was in a sharp downtrend. It took only one week for the pattern to form. Bearish flagpole was 300 pips and that was our minimum target. Stop loss was around 50 pips. Our target was reached and we were happy to make hundreds of pips.

 

eurusd bearish flag