What is a flag pattern?
Flag patterns are quite rare, yet powerful candlestick patterns.
They form in the shape of a flag… surprised?
They appear after a large move (just like pennants) but consolidate in a range sideways in forex trading.
Unlike pennants which consolidate higher, or lower.
These are really easy to spot and just as powerful to trade.
We have highlighted the flag pattern in yellow. As you can see the market has violently moved upwards before consolidating really quickly and shortly after the move. We want to see equal highs at the top as well as equal lows, this helps establish the range clearly.
The idea of the pattern is to trade in between this range and then breakout higher. It is one of the most powerful chart patterns you can spot.
How to trade flag patterns
Step 1: Identify the flag pattern
We can do this really easily by finding a sharp movement upwards followed by a swift consolidation period.
Step 2: Identify the support and resistance levels
This is where our rules on support and resistance levels vary a touch in the flag pattern. The aim here is to ensure the resistance is on the best-closed price (most recent) and near/or on other closes.
Secondly, with the support we want that to be on the lowest close, going forward with touch as many other closes as possible.
In this example above we switch to the Line graph to ensure we capture the best possible levels during the flag pattern.
Switching back to the candlestick view validates the accuracy for the flag pattern.
Step 3: Wait for breakout candle to reveal itself.
Once we have identified a potential flag pattern, you must wait for it to be validated. This is achieved by a breakout candlestick.
In the image above you can see the selected candlestick has marginally, but successfully broken out of the flag pattern range.
Step 4: Open the trade based on execution rules.
You want to put your entry level slightly higher than the breakout candlestick’s high (1-3 pips) and the stop loss at the breakout candlestick’s low.
As you can see the entry candle triggered the entry level as expected.
Step 5: Enter the Take Profit level
Now, to do this you must look at the volatility candle, the candlestick that pushed the market higher quickly and before the consolidation period. We can use this as a reference to produce an accurate minimum trading breakout range. This is the exact same process as the wedge and pennant Take Profit levels.
As you can see in this example, the expected move was at least 227 pips, which worked out. Over the last few pages, we hope you can understand that these pattern breakout ranges and actual breakouts are not luck.
Here is a candlestick pattern cheat sheet covering some of the most basic patterns to profit from.