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 stays near 1.0400 in thin holiday trading
EUR/USD trades with mild losses near 1.0400 on Tuesday. The expectation that the US Federal Reserve will deliver fewer rate cuts in 2025 provides some support for the US Dollar. Trading volumes are likely to remain low heading into the Christmas break.
GBP/USD struggles to find direction, holds steady near 1.2550
GBP/USD consolidates in a range at around 1.2550 on Tuesday after closing in negative territory on Monday. The US Dollar preserves its strength and makes it difficult for the pair to gain traction as trading conditions thin out on Christmas Eve.
Gold holds above $2,600, bulls non-committed on hawkish Fed outlook
Gold trades in a narrow channel above $2,600 on Tuesday, albeit lacking strong follow-through buying. Geopolitical tensions and trade war fears lend support to the safe-haven XAU/USD, while the Fed’s hawkish shift acts as a tailwind for the USD and caps the precious metal.
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In a filing on Monday, the US International Revenue Service stated that the rewards gotten from staking cryptocurrencies should be taxed, responding to a lawsuit from couple Joshua and Jessica Jarrett.
2025 outlook: What is next for developed economies and currencies?
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