Learning about price patterns is highly important in trading. Professional and novice traders use patterns, indicators and trendlines to conduct technical analysis. Even if you decide to be a purely fundamental trader and ignore technicals altogether, understanding how patterns work will help you find better entries and exits. Many fundamental traders use their analytical skills to determine market direction and technical analysis to locate best entries and exits. In this guide we’ll discuss what Flag chart patterns are and how to trade them properly.
Flag pattern definition
A flag pattern is a continuation chart pattern that appears in an uptrend or a downtrend and signals trend continuation after completion. There are bull and bear flags and they are mirroring each other. Flag patterns are frequent and very popular.
Why is understanding the Flag pattern important to traders?
- Flag patterns are widely used in technical analysis
- Bull and bear Flag patterns are mirroring each other. Therefore, by learning how to trade one of them, you will learn how to trade the other too
- Flag patterns are easy to spot due to their flag-like shape
- Understanding flag patterns in trading can give you setups with great risk to reward ratios
Flag pattern explained in more detail
Flag patterns show consolidation of trading activity in a specific area, that is followed by a sharp move in a trend direction. And therefore, Flag patterns are considered as continuation patterns. There are bullish and bearish flags that are traded in a similar manner but in the opposite direction as the two patterns mirror each other.
In order to trade the pattern the right way, you should always wait for the right moment. That moment comes when the first candle breaks and closes outside the pattern. In a bear Flag’s case, a Stop Loss order can be placed above the resistance line. Some traders prefer to use smaller Stops and place them right above the broken trendline. Potential profit targets can be as great as the length of the pattern’s flagpole. Sharp moves prior to consolidation are called flagpoles. No matter which trendline you choose for your Stop Loss target, it is obvious that the pattern offers an amazing risk to reward ratios. Consequently, the pattern is highly popular among financial traders.
Keep in mind that patterns are only valid once they are fully formed. And most patterns are formed once breakout happens and the candle closes outside a given pattern. Patterns work better in higher time frames as there’s less market noise. On the downside, patterns are purely technical and do not take into account what’s happening in the real world currently. That is why keeping an eye on the economic calendar is important when trading chart patterns.
Example of a flag pattern in forex
Now let’s take a look at the Flag pattern example. The pattern appeared on the GBP/USD chart. The sharp drop was followed by a consolidation that looked like a flag after adding the trendlines. Once the trendline support got broken and the first candle closed below the support, we could open a short position. Stop Loss order would be placed above the highest consolidation price and the Take Profit target is as large as the size of the flagpole.
Main takeaways from flag patterns in forex
- Flag patterns are price charts that show the consolidation of a prior trend, followed by a breakout
- A flag pattern consists of a flag pole and channel, due to visual similarities
- Flag patterns are followed by price action and volume indicators
- Traders use flag patterns to anticipate shifting market trends
FAQs on flag patterns in forex
What is a flag pattern in trading?
A flag pattern is a price chart pattern that appears after a consolidation of a prior market trend and signals trend continuation after the trendline is broken. Flag patterns get their name thanks to their shape. These patterns look like flags and are frequently occurring. Flags can appear in both: bull and bear markets.
Are Flag patterns bullish?
There are bullish and bearish Flag patterns. Both patterns mirror each other. Great thing about this is that once you learn how to trade either of the two, you will have no difficulty understanding the second one. Both can be traded in a similar manner, but in the opposite direction.