What is Flag Chart Pattern?
Flag Patterns are chart patterns, formed by price action, which is contained within a small rectangle or a parallelogram. This is created when there is a minor profit booking in either an uptrend or a downtrend.
They are the pressure areas in a stock chart, which may be a minor support or resistance, or it may even be a minor target. Here some traders want to book profit. But what ever the trend was, remains unchanged. This may result in a small swing or the price may remain flat. Both the support and resistance lines are either horizontal or sloping downwards in an uptrend or sloping upwards in a down trend.
It is a continuation chart pattern. It is so named because the pattern is in the form of a Flag. Hence the name Flag Chart Pattern.
Trend is your friend. Dance with the friend. Tune to the trend.
Flag pattern is formed because of increase in one of the two great forces which move the price up and down, that is demand and supply.
These are pressure areas in either an up trend or a down trend. Here the trend does not change into opposite trend. It only changes to a range bound side trend or a neutral trend. These are minor target areas or minor support and resistance areas where some traders wish to book some profit. These are just hiccups in a trending market.
In an up trend as the target area or the resistance area is approached there is increased selling. As the supply increases the price rise halts. The supply is almost absorbed by strong demand. So the price remains horizontal or it may retrace a little. Many candlesticks are stacked horizontally or there may be a small swing down.
When trend lines are drawn above the highs and below the lows of all the price bars we get almost parallel, horizontal or down sloping trend lines. If we draw vertical lines at the beginning or at the end of the these trend lines we get a rectangle or a down sloping parallelogram.
The price bars before the flag looks like the post of the flag. These are bullish flag patterns.
After all the selling is exhausted the bullish activity becomes apparent. When the demand becomes more than the supply the price breaks out of the flag pattern towards up side. Thus the up trend resumes and continues.
Similarly in a down trend as the target area or the support area is approached there is increased buying. As the demand increases the price fall halts. The demand is almost absorbed be strong supply. So the price remains horizontal or it may rally a little. Many candlesticks are stacked horizontally or there may be a small swing up.
When trend lines are drawn above the highs and below the lows of all the price bars we get almost parallel, horizontal or up sloping trend lines. If we draw vertical lines at the beginning or at the end of the these trend lines we get a rectangle or an up sloping parallelogram.
These are bearish flag patterns. The price bars before the flag looks like the post of the flag. Since it looks like an upside down flag post, this patterns are also called reversed flag patterns.
After all the buying is exhausted the bearish activity becomes apparent. When the supply becomes more than the demand the price breaks out of the flag pattern towards the down side. Thus the down trend resumes and continues.
Study the charts given below.
This chart shows a Bullish Flag Chart Pattern.
This chart shows a Bearish Flag Chart Pattern.
This chart shows a Flag Pattern which is horizontal.
Pattern trading is one of the strategies of making money in stock trading. Among the chart patterns flag pattern formation gives us the opportunity to enter or re-enter a trending market.
Flag patterns are just halting stations in an ongoing trend. The trend stops to continue or it retrace a little as not to cause a trend reversal. The market remains horizontal or neutral. Trading volume may decrease or remain intact.
Flag patterns in an up trend are bullish continuation patterns. So if the price rise stops or even retraces a little with out momentum, get ready to go long or add to your position above the pattern. The target is approximately as long as the pole of that flag. Always protect the trade by placing a sell on stop order below the low of the pattern.
Whereas in a down trend flag patterns are bearish continuation patterns. So if the fall of the price stops or even rally a little with out momentum, get ready to go short or add to your short position below the pattern. The target is approximately as long as the pole of that flag which is above the pattern. Always protect the trade by placing a buy on stop order above the high of the pattern.
Here Bull Flag is part of the rising swing of the Head and Bear Flag is part of the falling swing of the Right Shoulder of the Head and Shoulder formation.
Placing a stop loss order is a must because many time the trend reversal starts as a flat market. When the steam is completely over the trend reverses, the price moves in the opposite direction. Now this pattern becomes a reversal pattern.
In flag patterns all the candles are placed in a rectangle or a parallelogram. Where as in classical rectangle formation the price swings are placed in a rectangle. Click on the link given below to study about Rectangle Pattern Formation.
A small consolidation with converging upper and lower trend lines, forms a Pennant Chart Pattern. Click on the link given below to study about them.
There are many more chart pattern formation used in pattern trading. Some of them are listed below. You may click on the name of each chart pattern listed below to learn and understand more about them.
Continuation Chart Patterns