While stock trading, you will come across the ds popular term flag chart pattern, especially when going into technical analysis. So what do these chart patterns indicate? And how can they help with successful intraday trading strategies? A flag chart pattern is formed when the market consolidates in a narrow range after a sharp move . These flag patterns are a clear indication for price action for entry, stop loss levels, and target. The pattern is considered complete when the second sharp movement of price maintains the same direction as the first move. They’re generally small, which means relatively small risk and potentially quick profits. The pattern has a “flag” appearance because the small rectangle – the consolidation – is connected to the pole – the large and swift move. In this article we will look at what chart patterns are how they can help you with successful traders strategies.
What is a Flag Pattern
A flag pattern can usually be defined by the following criteria:
- At strong trending move (large bodies flag poles)
- Followed by weak pullback (small bodies flag poles)
- Both the support and resistance lines are either horizontal or sloping downwards in an uptrend or sloping upwards in a down trend, forming a flag.
- These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move.
- The pattern has a “flag” appearance because the small rectangle is connected to the pole (the large and swift move).
- The move which precedes the flag portion of the pattern (the pole) must be a sharp move, nearly vertical.
- Flags are often considered continuation patterns, meaning that the breakout tends to theoretically occur in the direction of the preceding move.
- The formation usually occurs after a strong trending move that can contain gaps.
- The pattern usually forms at the midpoint of a full swing and consolidates the prior move.
Bull and Bear Flag Patterns
A bull flag pattern is a chart pattern that occurs when a stock is in a strong uptrend. It is called a flag pattern because when you see it on a chart it looks like a flag on a pole and since we are in an uptrend it is considered a bullish flag. A bearish flag shows the exact opposite trends. The bull and bear flag patterns are characterised by five elements:
- Preceding Trend
- Consolidation Channel
- Volume Pattern
- Confirmation of Price Movement of Breakout
The Best Time To Trade Flag Patterns
There are primarily two best times when the markets are favourable to trade in flag patterns.
- After a Breakout: Generally when the markets are bullish, and there is a subsequent breakdown. When there is a breakdown, the flag pattern is on the first pull back. You will see a general rise, this indicates the best time to trade. This is because traders who missed the move will be waiting for a pull back. If a trade does break out in the same direction as the preceding move, the following profit target(s) can be used. Profit targets are based on two different methods.
- Conservative, which will likely result in a quick profit
- Aggressive, which will take longer for the market to hit but results in a larger profit
- Strong Trending Market: Alternatively, you can trade a flag pattern in a strong trending market. This is true when there is a strong trending move and pull back. Usually when the market is trending strongly, there is strong potential to trade in a pull back in the form of a flag pattern.
How Flag Patterns Form
The question really comes down to why the pole flag and pole patterns form so frequently in the market. One of the primary reasons is when there is good news, the formation of the first pole starts. On news of this good news some sellers want to move out of the stock. At the same time, some investors analyse the impact of the report on the longer term and start accumulating. It leads to the formation of the flag. As a result, more and more people want to be part of the stock that leads the stock higher.
A flag pattern is among the most popular chart patterns in stock trading. Flags are continuation patterns and are the best pattern for swing trading. It means the prior trend continues, and the flag is a midpoint of the full swing. Flag patterns are among the most successful trading strategies and majorly a choice of breakout traders and swing traders. Traders thus use both bull and bear flag chart patterns to identify continuation of trends.
Q: How do you identify a flag pattern?
Ans: After a sharp price movement, either upward or downward when the prices enter in a consolidation phase then the flag pattern may be formed.
Q: What is the difference between flag pattern and pennant?
Ans: The pennant pattern is identical to the flag pattern the only difference is that the consolidation phase of a pennant pattern is characterized by converging trend lines rather than parallel trend lines.
Q: How can I differentiate flag pattern with trend reversal?
Ans: A flag pattern is a type of chart continuation pattern and it does not indicate trend reversal.
Q: How reliable is the flag chart pattern for long-term investing?
Ans: Generally flag pattern is a short term pattern. For long term investing traders can look for other chart patterns like Inverted H&S and channels.
Q: Do “bear flag” and “bull flag” patterns always happen in the stock market?
Ans: Yes “bear flag” and “bull flag” patterns usually happen in the stock market. One should look at an area of consolidation which shows a counter-trend move that follows after a sharp price movement.