Flag Patterns

Flag Patterns are continuation chart patterns, formed by a minor consolidation, which is contained with in a small rectangle or a parallelogram.

Pattern Formation
In a clear uptrend, a small consolidation, creates a small range bound price action. The trend lines drawn at the highs and lows of this pattern are parallel, either horizontal or pointing downwards. This pattern, after a brief period, breaks out above to continue its uptrend. A vertical line from the beginning of the previous trend to the top, becomes the pole of the flag.

Similarly in a down trend a flag formation with parallel trend lines, which are horizontal or pointing upwards, breaks out downwards to continue its original trend.

Study the charts given below.

In an uptrend, trade is entered when the price breaks above the upper trend line. A stop loss order is placed below the pattern, or conservatively, it can be placed below the breakout bar.

Like wise in a down trend, trade is taken when the price breaks below the lower trend line. A stop loss order is placed above the pattern or conservatively, it can be placed above the breakout bar.

Variation
A small consolidation with converging upper and lower trend lines, forms a Pennant.

Some times a trend reversal starts with the formation of a flag. When it breaks out in the opposite direction it naturally becomes a reversal chart pattern.

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