In technical analysis, a flag is a chart pattern you can use to predict trend continuation. This article will teach you how to detect a flag on the price chart and which trading strategy you should apply.
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A flag usually forms during a strong market trend. This pattern consists of a
sharp price movement (or the flagpole) and a short-range-bound movement
against the trend (or the flag itself) following it. That's why a flag is also called
the flag and pole pattern.
Flags can form on both upward and downward trends. If a flag forms on an upward
(bullish) trend, it gets called the bullish flag pattern. If it forms on a downward (bearish)
trend, it's called the bearish flag pattern or the inverted flag pattern.
A valid flag indicates that the general trend will probably continue in the same
direction. When a bullish flag forms, the trend may continue going up afterwards.
If a bearish flag appears, the trend will probably resume its downward movement soon.
The flag and pole chart pattern is one of the most reliable
continuation patterns. It works on all timeframes and for any instrument,
including Forex pairs, stocks, and crypto. However,
you must learn to identify and confirm it to avoid mistakes and unnecessary losses.
To find a bull flag pattern, wait for a sharp price surge. When it turns into a slight downward
consolidation, look for the flag's body fitting between two parallel lines. Once the price
breaks out from the upper line, it will probably continue going up, completing the pattern.
To find a bearish flag and pole pattern, locate a sharp price decline. Look for a slight upward
consolidation when the price increases between two parallel lines. Once the price breaks
out from the lower line, it will probably continue going down, completing the reverse flag pattern.
A valid flag usually lasts five to twenty price bars, and its body must be smaller than the pole.
Make sure the lines constraining the flag pattern are roughly parallel. If they visibly
converge, it is another chart figure called the wedge pattern. A wedge can signify a
possible trend reversal if its trend lines are aligned with the current trend's direction.
You can confirm an upcoming flag pattern breakout by looking at volume patterns. The volume tends to increase during the initial movement and then slightly decline. Wait for a sudden increase in volume at the possible breakout point to confirm the trend continuation.
A correctly identified rising flag pattern indicates an upward trend, so prepare to buy the asset.
The psychology behind the ascending triangle pattern is that some buyers
patiently wait for the breakout, placing higher bids. Once the pattern gets
confirmed, more buyers rush in, pushing the price up.
Seeing a flag pattern upside down means you should expect the downward trend to continue.
The triangle pattern usually predicts a strong trend, but it can move in either direction
Look for a consolidation with a narrowing price range within two converging trend lines
Ascending triangles are mostly bullish (Buy), descending triangles are bearish (Sell)
Wait for a retest, a sharp volume increase, or an obvious trend to confirm the pattern
Prepare to set your Stop Loss and Take Profit levels for various breakout scenarios