Meaning of Flag Pattern

Technical analysis will often use the term flag pattern. This is a pattern that occurs when there is a sudden rise or fall, followed by a narrow price range trading and finally a sharp decline.

When the second sharp price movement continues in the same direction that the first, which started the trend, the pattern is complete. Flag patterns can be short-term patterns that last for a few weeks.

What does a flag look?

- A flag chart is composed of a body and an flag pole.

- The body is rectangular and is made up of two parallel lines. The flagpole is attached to the rectangle, which is a fast and large move.

Pennant, another term often used interchangeably if you are interested in flag charts. There is a slight distinction between a flag, and a pennant. A pennant's midsection has trendlines that converge, whereas a flag's mid section doesn’t have any trendlines.

Bull flags

There are two types of flag charts: bullish flag patterns or bearish flag patterns. A bullish flag chart pattern is seen during an uptrend and indicates that the uptrend may continue. A bearish flag chart pattern forms in trading during a downtrend. This indicates the possibility of a bearish trend continuing.

Flag patterns are defined by five elements: The trend preceding it; the consolidation channel; volume pattern; breakout and confirmation where the price movement is the same as the breakout.

Trading Flag pattern

A bull flag is a sign of a consolidation. It occurs when there is an uptrend. This indicates that there is more enthusiasm to buy on the upward move than the downward move. You can trade the bull flag by waiting for price to break through consolidation resistance to make an entry (long). The trend is continuing after the breakout.

As suggested previously, a bear flag chart pattern looks like a bullflag has been inverted. It occurs in a downtrend. The bear flag is a sign of a consolidation that is slower and more prominent after a strong move from the lower side. This means that more people are willing to sell on the downwards move than the upwards. The security's momentum remains negative.

You can trade a bear flag if you wait until the price drops below the consolidation support.You can then enter the market (short).

Be aware of volume

Volume is an additional dimension to trading flag patterns. If the flag pattern does not have volume, it is not reliable.

A bear flag pattern is one that you want to trade. This means you need to see the trend before the flag grow in volume. A rising volume in conjunction with a flagpole or downtrend would indicate greater enthusiasm from the selling side. Ideal circumstances would see the flag have a low volume.

If you're looking at a bull-flag pattern in trading, you want to see more volume. This would indicate a higher level of enthusiasm from the buyers. This flag should be smaller in volume.

Flag pattern traders would like to see breakouts along with high-volume bars. This is a sign of a strong force which shifts prices in a new trend.

Stop loss

Stop loss is a question traders often answer by setting the stop-loss point at the opposite side of the flag pattern.

Conclusion

The flag pattern is one of the most popular chart patterns used in trading. The flagpole indicates the trend that precedes the flag. The flag represents a consolidation following a trend. Flag patterns in trading are a short-term continuation pattern. They signify a small consolidation after which the previous move is renewed. To identify the continuation of trends, traders use both bull- and bear-flag chart patterns.