Flags are chart patterns which occur mainly during the consolidation periods, particularly while the market exists in a tight range. When it comes to flag formation, it has both optimistic and pessimistic interpretation. But this relies upon the currency pair´s trend existing in the market. When the Forex market (or any other financial market) goes up, the bullish flag (descending flag) tends to move downwards and when the market moves down, the bearish flag (ascending flag) will move upwards. Remember, flags and pennants are closely connected and have an extension pattern that will represent a pause over the market dynamics.
These chart patterns are most usually observed after a huge and intense move in the market trends. With a breakthrough in the market, there will be a usual uptrend/downtrend in the market following the same direction. Many potential resources and case study have stated that, the flag chart pattern has proven to be one of the most reliable formations in the charts market analysis.
Flags are categorized into 2 extensive divisions. They are Bullish and bearish flags. The bullish flags (descending flags) are identified for the lower tops and bottoms, while the pattern generally goes in a slanting direction towards the trend. Like the wedges, the trend line of the flag chart patterns run parallel. The bearish flags (ascending flags) are represented with greater tops and bottoms. Where “Bear” represents the slope occurring in the trend and the trend lines also run parallel in this pattern!
The flag chart patterns are most usually examined within the trends and they are marked with great rates following a slender retracement in the pricing action. This chart pattern usually appears like a flag on its pole.
The price target can be calculated as the the height of the overall downward/upward trend prior to the formation of the ascending/descending flag and then extended that high on the last highest/lowest point of the pattern.
Remember, the bull pattern represents the uptrend in the market while the bear pattern represents the downtrend occurring in the market. Examining both the flag patterns in detail will give you better idea about implementing them in your trading analysis.
How to trade with the Flags?
The main principles to trade with the flags are the following:
- Always trade this formation in the direction of the previous main trend
- If the previous trend was bullish, the trader must wait for a breakout to the upside and open a long position when the currency pair rises above the upper resistance trendline.
- The stop loss should be placed a few pips below the lower support trendline.
- If the previous trend was bearish, the trader must wait for a breakout to the downside and open a short position when the currency pair moves bellow the lower support trendline.
- The stop loss should be placed a few pips above the upper resistance trendline.
Examples of the Flag pattern