Flag pattern

A flag pattern is a short consolidation after a sharp move. One side pushes price quickly, some of those traders take profit, and price slips back a little while the other side fails to take control. When price leaves the flag in the direction of the pole, the earlier move is read as resuming.

The name comes from the shape: a near-vertical pole with a small tilted rectangle at its end.

• Flagpole – a steep move over a few candles, larger than the moves before it and usually on high volume.
• Flag – a narrow channel of small candles between two parallel lines. It slopes against the pole or runs sideways.
• Breakout – a candle that closes outside the flag in the direction of the pole.
• Target – the length of the pole measured from the breakout price.

A bull flag forms in an uptrend. The pole points up, the flag slopes down, and the pattern is complete when a candle closes above the upper line of the flag. The pullback is shallow and orderly: buyers give back a small part of the rise and then step in again.

A bear flag forms in a downtrend. The pole points down, the flag slopes up, and the pattern is complete when a candle closes below the lower line of the flag. The bounce is weak and recovers only a small part of the drop before sellers return.

• Start from the pole. Without a fast, clear move the pattern is an ordinary pullback.
• The flag is small compared with the pole. As a rule of thumb traders want it to take back less than half of the pole.
• The flag moves against the pole. A channel that slopes in the same direction as the pole is a slowing trend, not a flag.
• The flag is short. On a daily chart it usually lasts from a few days to about three weeks.
• Volume fades inside the flag and returns on the breakout.
• Draw the flag with the channel tool or two parallel trend lines through its highs and its lows.

• Entry – on a close outside the flag in the direction of the pole: above the upper line of a bull flag, below the lower line of a bear flag.
• Stop – on the far side of the flag: below the low of a bull flag, above the high of a bear flag. A close back through that level means the pattern has failed.
• Target – measure the pole and project it from the breakout price. It is an estimate, not a level price has to reach.
• Position size – set it from the distance between the entry and the stop, so that a failed flag costs a fixed, small part of the account.
• Check the idea on history first. Replay on Charts steps forward candle by candle and shows how each flag played out after the breakout.

A pennant is the closest relative of the flag. Both follow a steep pole and both are continuation patterns. In a flag the two lines are parallel and the channel tilts against the pole. In a pennant the two lines converge into a small triangle that runs sideways. Entry, stop and target are set in the same way.

• Entering inside the flag – until price closes outside, the pullback can keep going.
• Calling a deep pullback a flag – a move that takes back most of the pole shows that the other side is in control.
• Ignoring the wider picture – a bull flag directly under strong resistance or a bear flag directly above strong support has less room to run.
• Chasing a late entry – after a long breakout candle the stop is far away and the trade no longer pays for its risk.
• Trading the third or fourth flag in a row as if it were the first – late in a trend each new flag is less reliable.