Prices do not simply move up and down on a chart. Even when the security is in a trend, price will move with the trend, pause and correct, and then continue in the trend direction. Often there will be a pattern observed on the chart when price is in the pausing mode. Understanding and recognizing these patterns can offer traders higher probability trading opportunities.
One of the most common and popular patterns is the flag. The flag formation can either be bullish or bearish depending on the trend and shape. Let’s examine the flag patterns and learn how they can help improve trade decisions.
What Is a Flag Pattern?
The flag pattern is called a flag because the price action on a chart resembles a flag sitting on a pole. The pole is created by a sharp rise or fall in price and is then followed by a sideways trend that ends with another sharp rise or fall in price.
Bull Flag Patterns
A bull flag pattern is formed by a rally in price with an increase in volume. The high volume during the rally exhausts the buying pressure that was propelling price higher, which forms the pole. Price then consolidates, forming the flag, and then moves either sideways or against the trend as investors wait for more buying pressure to build up.
How to Trade a Bull Flag Pattern
When trading bull flag patterns, there are several potential entry areas for a long position. The first long entry can be taken once prices break upwards out of the flag itself. A second potential entry point is when price makes a new high. Lastly, traders can wait for prices to retest the breakout point by changing their chart to a lower time frame.
A stop loss can be set below the beginning of the flag formation or one times the Average True Range below the entry price.
The flag is often said to be flying at half-mast. This means that the move following the breakout of the flag is often equal in size to the move before the flag itself. So, the target for the trade can be a move equal to the size of the flagpole.
Traders should always identify their supply or demand zones, as they are more powerful and reliable than measured moves in patterns for setting targets.
For a long position, the next supply zone on the chart would make the best target.
Bear Flag Pattern
The bear flag is a consolidation pattern that follows a sharp selloff. The volume characteristics should be the same as what we saw for the bull flag. Increase in volume on the initial drop, then a drop in volume during the flag/consolidation, and an increase in volume after the breakdown.
How to Trade a Bear Flag Pattern
The trading strategy is similar to that of the bull flag pattern. Entry for a short is when prices break down to a fresh low, a breakout of the flag, or a retest of the breakout point after the flag was formed.
Keep in mind that the patterns are just an odds enhancer for Online Trading Academy’s Core Strategy. The Core Strategy should always be followed without fail. If you are not familiar with Core Strategy, enroll in an introductory class and learn strategies to help you navigate the financial markets.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD extends losses on dovish remarks from ECB members, trades near 1.0780
EUR/USD continues its downward trend for the fourth consecutive day, driven by a stronger US Dollar influenced by the hawkish market sentiment surrounding the Federal Reserve and expectations of prolonged higher interest rates.
GBP/USD trades sideways above 1.2600 amid quiet session
The GBP/USD pair trades sideways around 1.2622 during the early Friday. The market is likely to be mute in light trading on Good Friday. Later in the day, the US Core Personal Consumption Expenditures Price Index will be released.
Gold ends Q1 2024 at record highs, what’s next?
Gold is sitting at an all-time high of $2,236, lacking a trading impetus amid holiday-thinned conditions on Good Friday. Most major world markets, including the United States are closed in observance of Holy Friday, leaving volatility around Gold price highly subdued.
Ripple's move above this key level could trigger nearly 50% rally for XRP
Ripple price has overcome a critical resistance level and flipped into a support floor on the weekly time frame. This development happened while XRP tightly consolidated for roughly 250 days. As this coiling up comes undone, investors can expect XRP to kickstart a massive rally.
Will they won’t they cut rates is the question of Q2?
There has been some significant push back from Fed and Bank of England members around the timing of rate cuts, and the Bank of Japan still haven’t physically intervened in the FX market to stem yen weakness although they are threatening to do so.
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