CHART PATTERN - FLAG PATTERN

 

In this post we would cover -

• What is a Flag Pattern and its identification?
• How to trade the pattern?
• When the pattern performs best?

Flag is a short slopping rectangle bounded by 2 parallel trend lines as seen in the image below. 

 

 

Flag is formed after a Steep, Quick Price trend and a short usually from few days to less than 3 week of consolidation or a pause in its previous trend movement.

 

Volume decreases during the time of consolidation, however this is not a hard and fast rule.  

 

After we find the pattern on above mentioned rule we can trade the pattern in 3 ways - 

• Place a trade on the Lower/Upper trendline of the pattern and wait for the breakout and target price. 
• Place the trade on breakout of the trendline for the target price. 
• Place the trade on retest of the pattern and wait for the target price. 

 

Above mentioned strategies have their Pros and Cons with respect to Risk and Reward so choose wisely according to risk taking capacity. 

 

Target is Measured movement of the lenght of the pole from the lower trendline of the flag.

 

Most popular is second strategy to trade on the breakout and mostly recommended. 

 

BEST PERFORMANCE

 

• If Flag pattern is formed near All time High/Low of the stock or immediate resistance/support are little far away from the breakout point
• Pattern is formed for a short period of time usually less than 3 weeks time.
• Go for flag pattern which is in tune with the trend of the sector/market.

 

Happy Investing

 

Disclaimer - Every pattern has a chance to not perform as required as financial market works more on human pyschological nature rather than some mathematical calculation. So always be ready to adjust a little accordingly.