Flag

What Is a Flag?

With regards to technical analysis, a flag is a price pattern that, in a shorter time span, moves counter to the predominant price trend saw in a longer time span on a price chart. It is named due to the manner in which it helps the watcher to remember a flag on a flagpole.

The flag pattern is utilized to recognize the conceivable continuation of a previous trend from a place where price has floated against that equivalent trend. Should the trend resume, the price increase could be quick, making the timing of a trade profitable by seeing the flag theme.

How a Flag Pattern Works

Flags are areas of tight consolidation in price action showing a counter-trend move that follows straightforwardly after a sharp directional movement in price. The pattern ordinarily comprises of somewhere in the range of five and twenty price bars. Flag patterns can be either up trending (bullish flag) or descending trending (bearish flag). The lower part of the flag shouldn't surpass the midpoint of the flagpole that went before it. Flag patterns have five fundamental attributes:

1. The previous trend
2. The consolidation channel
3. The volume pattern
4. A breakout
5. A confirmation where price moves in a similar course as the breakout

Bullish and bearish patterns have comparative designs yet vary in trend heading and unpretentious differences in volume pattern. The bullish volume pattern increases in the previous trend and declines in the consolidation. Conversely, a bearish volume pattern increases first and afterward will in general hold level since bearish trends will more often than not increase in volume over time.

A flag's pattern is likewise described by parallel markers over the consolidation area. In the event that lines meet, the patterns are alluded to as a wedge or pennant pattern. These patterns are among the most solid continuation patterns that traders use since they create a setup for entering an existing trend that is ready to proceed. These developments are comparable and will quite often appear in comparative circumstances in an existing trend.

The patterns likewise follow a similar volume and breakout patterns. The patterns are portrayed by diminishing trade volume after an initial increase. This infers that the traders pushing the overall trend have less criticalness to proceed with their buying or selling during the consolidation period, subsequently setting up the possibility that new traders and investors will take up the trend with energy, driving prices higher at a pace speedier than expected.

Flag Pattern Examples

In this illustration of a bullish flag pattern, the price action ascends during the initial trend move and afterward declines through the consolidation area. The breakout may not necessarily in all cases have a high volume flood, yet analysts and traders like to see one since it suggests that investors and different traders have entered the stock in another wave of excitement.

In a bearish flag pattern, the volume doesn't necessarily decline during the consolidation. The justification for this is that bearish, descending trending price moves are typically driven by investor fear and uneasiness over falling prices. The further prices fall, the greater the criticalness remaining investors feel to make a move.

Hence these moves are portrayed by higher than average (and expanding) volume patterns. At the point when the price stops its descending walk, the rising volume may not decline, yet rather hold at a level, suggesting a delay in the tension levels. Since volume levels are already raised, the descending breakout may not be pretty much as articulated as in the vertical breakout in a bullish pattern.

Instructions to Trade a Flag Pattern

Utilizing the dynamics of the flag pattern, a trader can lay out a strategy for trading such patterns by just distinguishing three key points: entry, stop loss and profit target.

1. Entry: Even however flags recommend a continuation of the current trend, it is prudent to trust that the initial breakout will stay away from a false signal. Traders regularly hope to enter a flag on the day after the price has broken and closed above (long position) the upper parallel trend line. In a bearish pattern, the day after the price has closed below (short position) the lower parallel trend line.
2. Stop Loss: Traders commonly hope to utilize the contrary side the flag pattern as a stop-loss point. For instance, on the off chance that the upper trend line of the pattern is at $55 per share, and the lower trend line of the pattern is at $51 per share, then, at that point, some price level below $51 per share would be a legitimate place to set the stop-loss order for a long position.
3. Profit Target: Conservative traders might need to utilize the difference, measured in price, between the flag pattern's parallel trend lines to set a profit target. For example, in the event that there is a $4.00 difference and the breakout entry point is $55, the trader would place a profit target at $59. A more hopeful approach is measure the distance in dollar terms between the pattern's high and the base of the flagpole to set a profit target. For instance, on the off chance that the least price of the flagpole is $40, and the highest point of the flagpole is $65, and on the off chance that the breakout entry point were $55, the profit target a trader could hope to see accomplished would be $80 ($55 plus $25).

Notwithstanding these three key prices, traders ought to pay close regard for position size decisions and overall market trends to boost progress in utilizing flag patterns to direct trading strategies.

Highlights

• A flag pattern, in technical analysis, is a price chart described by a sharp countertrend (the flag) succeeding a short-lived trend (the flag shaft).
• Flag patterns imply trend inversions or breakouts after a period of consolidation.
• Flag patterns are joined by representative volume indicators as well as price action.