Flag Patterns

A flag pattern is a price chart formation that suggests a continuation of the existing trend. Learning how to trade flags can be a lucrative tool to add to your toolbelt.

It typically happens after a significant price movement, known as the flagpole, followed by a consolidation phase that forms the flag.

The flag itself can be rectangular and may slope against the prevailing trend, indicating a temporary pause before the trend resumes.

Types of Flag Patterns

There are two primary types of flag patterns: bull flags and bear flags. In each version, the price channel runs at an angle against the current trend like in the example below showing a bullish flag.

How to Trade Flag Patterns

1. Identify the Flagpole: Look for a sharp price movement with significant volume, which sets the stage for the flag pattern.
2. Wait for Consolidation: Allow the price to consolidate within a channel, forming the flag.
3. Watch for Breakout: Enter a trade when the price breaks out of the flag pattern in the direction of the prevailing trend. Confirm the breakout with an increase in trading volume.
4. Set Targets and Stops: Measure the length of the flagpole and project it from the breakout point to set profit targets. Place stop-loss orders below the lower trendline of the flag (for bull flags) or above the upper trendline (for bear flags) to manage risk.