Flag Trading The Trend – In-Depth Guide To Forex Flag Pattern Trading

Last Updated on September 30, 2020 by Alphaex Capital
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Technical traders use a variety of trading techniques in the financial markets.

The flag pattern is a popular candlestick pattern used to define trend extensions.

This type of patterns proves to be an excellent addition to any forex trader’s technical toolkit.

In this guide, we take a look at the Forex flag pattern trading technique and understand the different flag patterns and their significance in trading.

Flag Trading The Trend – What It Means?

A flag chart pattern is formed when the market consolidates after a strong move.

Flag patterns are an important part of any technical analysis and traders use them with other analysis to optimize their odds.

Flag trading the trend is simple and small which means there is a relatively small risk with quick profits.

This type of chart pattern has a flag appearance as the consolidation is a small rectangle connected to the pole that denotes a swift yet large move.

Flags are created by sharp price moves followed by consolidation that runs between parallel lines.

Flag trading a trend means trading breakouts of the consolidation.

A breakout can either be in the same direction as the sharp move or in the opposite direction.

Flag Trading The Trend

The best time to trade a flag is when the price moves near the average or at the pullback time after the breakout.

If the price forms a bear flag, you can time your entry by shorting the breakout low.

You can otherwise short the break of the trend line.

For the Forex market, this is equal to one or two pips while it is $0.01 or $0.02 in the stock market.

In the futures, it is one tick.

To flag trade the trend, one can place an entry at the lower end of the channel or wait for it to break above the upper channel.

Getting Started With Flag Pattern Trading

It is easy to identify a bear flag pattern if the trader understands the components.

This applies to all the financial markets and not just Forex.

The trader should identify the flag pole that denotes the initial decline.

The decline is either slowly or steep sloping and forms the basis of the trend.

The bear flag is a representation of the period of consolidation once the initial decline is completed.

To identify a buy signal, you can look for the prices to penetrate and close above the upward resistance line.

When the price moves higher and consolidates, a channel of resistance has been formed.

The pattern completes when the price breaks out of the trendlines in the same direction as the existing trend and continues to move further.

The easiest way to trade a flag pattern is to wait for a breakout and trade it when it occurs. Predicting the direction of the breakout is an advanced skill.

To determine the pricing level, measure the distance of the decline in pips and subtract it from the peak resistance formed on the flag.

One can use one of the two profit targets or both.

The first target is based on the distance between the parallel lines while the other is based on the pole.

Those who are trading in forex should flag trade during the volatile times of the day only which are ideal for trading EUR/USD.

Future or day traders should consider trading only during the most active times.

Flag Breakout Pattern

A technical pattern showing the continuation of an existing trend is represented by a flag breakout.

The formation of a flag comes from a sharp initial move down and then a consolidation channel in the upward direction.

The sharp move is called the ‘flagpole’ while the consolidation itself is called the flag.

The flag portion of the chart pattern forms between the parallel lines and can be either sideways, slanted up or down.

If the flag is at an angle in the direction same as the previous move with a flag slanting up and pole up would degrade the pattern’s performance.

This is why the ideal flag pattern has a sharp move. If the sharp move is downward, you want to trade a sideways flag that moves opposite.

The move that precedes the flag in the pattern should be a sharp one, almost vertical and should be swifter and larger as compared to the recent price moves.

Such an abrupt price movement depicts strong selling and buying action.

This type of action is what traders want to capitalize on by flag trading a trend.

Bull Flag Rule downs

Bull flag patterns offer an amazing trading strategy but the most difficult thing is to identify decent flags.

  • Here is a set of rules you can use for trading bull flag patterns.
  • The asset surges up on a high volume, particularly from a news-driven event
  • Prices consolidate at or near highs with a specific pullback pattern
  • The best time to trade a bull flag is when it occurs after a price breakout
  • One should place a stop order below the bottom of a consolidation pattern
  • The profit targets should be a minimum of 2:1 risk/reward
  • A bull flag pattern generally has these characteristics:
  • A pole is formed as the asset moves strongly up on high volume
  • The asset consolidates near the top of the pole on lower volume to form a flag
  • Asset breaks out of the consolidation pattern on high volume as an indication of the trend continuation

Bull Flag Vs Pennant

Bull flags and pennants are powerful chart patterns used in technical analysis.

Both are continuation patterns occurring in strong trends.

A bull flag pattern takes shape when the asset retraces and indicates the situation through the gradual decline after an initial big price rise.

Looking at the graphical representation of the bull flag pattern, you can realize that it looks similar to a flag on the pole.

The bull pennant, on the other hand, is also a continuation pattern occurring in assets with strong uptrends.

It is created from a consolidation period of an upward flag and represents the trend’s continuation following the breakout.

Traders keep a watch on the break above the pennant to benefit from the bullish momentum.

Conclusion

Flag trading is one of the most popular price action strategies and can provide forex traders with great risk to reward ratios.

It might take some time and experience to successfully spot flag chart patterns, but once you get a hang of it, this could very well be your primary strategy.

This strategy works best when the underlying security only follows the technicals of the market, with no external news or events affecting the price.

When there are any external factors at play its best to avoid any trades with this strategy.

There are numerous variations and setups that come with flag trading, and when you get a hang of them, you should be able to turn consistent profits day after day.

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