What are Flags patterns?
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 Pattern Description
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 below the lower support trendline.
- The stop loss should be placed a few pips above the upper resistance trendline.
Example of the Flag pattern