How to trade Flags

A flag chart pattern is formed when price consolidates after a sharp move. They are relatively small and are traded for small quick profits. They are called flags because they are in shape of a flag attached on a pole.

They are continuation patterns that form  a small consolidation before the trend continues. They appear both in uptrend and down trend forming bullish flags and bearish flags.

Bullish flag

There must be a sharp price movement in uptrend before the formation of the pattern.  It is rectangular shaped pattern with two parallel trend lines sloping in the opposite direction of the initial sharp movement. These act as support and resistance levels.

A strong price break in the same direction of the initial trend (upside) gives a signal for trend continuation.

The buy signal is the close of the confirmation candle above the upper slopping line. Your target profit should be equal to the distance moved by price before formation of the flag or the flag pole and stop-loss is set slightly below your entry point.

Take a look at the chart below;

From the chart above, the Buy signals 1 & 2 were confirmed by candle close above the upper line as shown in the chart above.

The profit target is equal to the distance moved by price before formation of the flag (H) or the flag pole and stop-loss is set slightly below your entry point as indicated on the above chart.

Bearish flag

There must be a strong price movement in a downtrend before formation of the pattern.  It is rectangular shaped pattern with two parallel trend lines moving up to the opposite direction of the sharp movement. These trend lines act as price support and resistance.

A strong price break on the lower trend line signals a probable downtrend continuation.

Sell entry is when price breaks the lower rising trend line of the flag and  set your stop-loss slightly above the entry position. The target profit level is be equal to the size of the flag pole from the broken level.

Let’s take a look at the EURUSD, Hourly chart below;

Flags are easy to trade. Notice on the chart above, the sell entry is when price breaks the lower rising trend line of the flag. The stop-loss slightly above the entry position. The target profit level is be equal to the size of the flag pole (H) from the broken level as shown above.

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