The Flag pattern is one of the most famous patterns for investors participating in the market, whether it is stocks, forex or Crypto. It is a pattern that rarely appears, but every time it appears, it can bring a very potential investment signal, so detecting this pattern quickly and accurately is what many investors want. Now, let's go deeper into the Flag pattern with Trading Insight and how to apply the Flag pattern to investment transactions to seek profits. Don't forget to follow and interact with Trading Insight.
What is the flag pattern?
The Flag pattern is a continuation price pattern in technical analysis that forms after a period of extreme market activity. The appearance of the flag pattern indicates that the market is taking a break to gain momentum before continuing the original trend.
The flag pattern consists of two main components: the flagpole and the flag. The strong upward price trend is called the 'flagpole', while the slow downward countertrend is called the 'flag'.
Flagpole: Is the price line going up or down vertically like a flagpole. This is the initial price move and also an important signal that determines the next price action after the price breaks out of the flag.
Flag: This is a correction phase, a pause after a strong uptrend or downtrend. The flag is made up of two parallel trendlines, one that goes through the peaks and one that goes through the troughs. The flag tends to trend in the opposite direction to the flagpole.
Trend continuation: After the price breaks out of the flag the pattern will either increase or decrease sharply in the direction of the old trend.
The flag pattern is one of the most widely used chart patterns in investment trading. The flagpole is an indication of the trend preceding the flag. The flag represents consolidation after an uptrend or downtrend. The flag pattern in trading is a short-term continuation pattern that represents a small consolidation followed by an extension of the previous move. Therefore, traders use both bullish and bearish flag chart patterns to identify the continuation of trends.
Flag model classification
The illustration above shows a bullish flag pattern. However, the bearish flag pattern has similar components. The difference is that the bearish flag is exactly the inverse of the illustration above.
Bullish Flag
The Bullish Flag pattern usually appears after a strong uptrend or it can also be a slight increase with a gentle slope of the flagpole.
The flag is created by two parallel resistance and support lines, slightly sloping downwards in the opposite direction of the previous uptrend.
Price breakout from the upper edge of the flag will continue to increase strongly, continuing the initial trend.
The bullish flag pattern shows that buyers are initially holding the market, continuously pushing prices higher in line with the main trend. The flag part is just a corrective decline, conserving energy to prepare for a stronger breakout.
Bearish Flag Pattern
The Bearish Flag pattern usually appears in a strong or moderate downtrend.
The flag section is an upward correction created by two parallel resistance and support lines, slightly slanted upwards, in the opposite direction to the initial downtrend.
When the price breaks out of the lower edge of the flag it will continue to fall sharply in the original trend.
The bearish flag pattern shows that the sellers initially held the situation. But after a period of sharp decline, many investors took profits and rested, forming the flag. When enough accumulation is made, the sellers will gather strength to push the price to break through the lower price channel, pushing the price back to the old trend.
The flag pattern is characterized by five elements: a preceding trend, a consolidation channel, a volume pattern, a breakout, and a confirmation where the price action is in the same direction as the breakout. Volume must be high during the uptrend or downtrend forming the flagpole. High volume gives validity to the sudden move and clarity creates the flagpole. An increase in volume upon breaking the resistance (support) level indicates the validity of the formation and a high probability of continuation of the pattern.
Meaning of Flag pattern
The flag pattern can be easily recognized by the naked eye. Each part of the flag pattern will give us an overview of the market sentiment and predict the upcoming price action, while providing potential Buy - Sell signals.
Flagpole Section - Gives a panoramic view of the market
As introduced above, the length of the flagpole and the slope of the flag will give investors a comprehensive view of market trends.
If the length of the flagpole is at least twice as long as the slope of the flag, it indicates a fairly strong trend and a very reliable trend continuation signal. At this point, investors can develop a trading strategy in the direction of the trend.
Conversely, if the length of the flagpole is equal to or shorter than the slope of the flag, it shows that the previous force is not strong enough and the trend continuation signal is weak.
The amplitude of the flag's oscillation evaluates the model's effectiveness.
After a strong uptrend, prices begin to trade sideways in a fairly narrow range, often moving slightly in the opposite direction of the initial flagpole trend. The two trendlines that mark the top and bottom of that range now give the pattern a sloping rectangle – like a flag.
Based on the oscillation amplitude of the flag, investors will also evaluate whether the signal provided by this model is effective or not. Flag models with narrow amplitude, the distance between support and resistance is closer, more effective than models with wide amplitude or difficult to predict.
The narrow flag amplitude shows that the momentum of the remaining side is quite weak, not enough to pull the price to reverse. The narrow flag combined with the long flagpole shows a stronger signal of trend continuation.
The wide range of the flag indicates that the momentum of the other side is very strong, so the pattern will not be effective. Especially if the flagpole is short, the continuation signal is even worse.
Provide optimal entry signals
After the Flag pattern is completed, the price breakout from the flag will continue the strong initial trend. At that time, investors can seize the opportunity to enter buy and sell orders in the direction of the trend to make a profit. At the same time, determine effective stop loss and take profit points.
How to trade with the Flag price pattern
Buy-sell entry point
Place a buy order as soon as the price breaks out in case the price breaks out of the bullish flag pattern.
Take profit: If the pattern is correct, the price will rise or fall by the height of the flagpole. Therefore, the ideal take profit point is the height of the flagpole away from the breakout point.
In the case of a bearish flag pattern, a sell order should be placed when the price breaks the lower support line.
Trading Trends
The uptrend before the flag is considered the flagpole. The flagpole represents a sudden price movement up and down. The flag pattern acts as a market signal to reduce risk. The downtrend reflects the reaction of investors who are willing to sell at low prices. This is a trend trading strategy, so it is much safer than reversal trading.
Notes on using the flag model
To use the flag model effectively, investors still need to remember the following notes:
The flag pattern appears after a strong increase/decrease, indicating a pause in the market control. Then, at the end of the accumulation period, the price breaks out to move in the same direction as the old trend.
The flag part of the Flag pattern needs to move the price channel parallel to the up/down momentum of the main trend. In case the price moves sideways or in the same direction as the main trend, the pattern is not really accurate.
The flagpole should have a clear height and the flag should have a narrow channel amplitude, only ⅓ of the height of the flagpole.
The flag part oscillates with an amplitude of about 1/3 of the flagpole to increase the accuracy ratio.
The time period of model formation is also one of the important factors that determine the level of accuracy.
Trading volume tends to weaken during the pattern formation phase and increase when price breaks the support or resistance line.
Flag patterns can appear on any time frame. However, the signals will be noisier on smaller time frames than on larger time frames.
The signal from the flag pattern should not be traded alone but should be combined with other signals to increase the probability of success. Other signals can come from indicators or reversal candlestick patterns.
Always have a plan for capital management and risk prevention. Especially never ignore stop loss and take profit for any transaction order. These will be 2 tools to help minimize risk and optimize profit best.
The flag pattern is not a very common price pattern asdouble top pattern or triangle model, but the signal it brings is quite reliable. Hopefully, through the article that Trading Insight has just shared, you can apply it and make a profit. Wish you good luck in trading. Thank you Vietcap for having quality content.
