Flag pattern is a common price pattern in financial markets. It is mainly used in forex and stock markets. When this pattern appears, it is often a sign of a continuing trend. That means if the flag pattern is in an uptrend then the price will keep rising. If it is in a downtrend, then the price usually continues to fall.
Description of flag pattern
The flag pattern consists of a "flag" part and a "flag" section. The flag part represents its current trend. The price flag part fluctuates in a narrow range, following a small downward channel that looks like a flag.
Flag pattern in actual price chart
The flag model itself has increased (or decreased) the price (flag handle) and adjustment part (flag). However, in practice this pattern often appears when it is in a major trend.
The pattern appears in an uptrend called the bullish flag pattern. See the picture below.
The pattern appears in a downtrend called the bearish pattern. See the picture below.
Note when using the flag pattern
- To make good use of the flag pattern, you have to look at it in a whole process ahead of it. If based on the Elliott wave principle, the "flag" part is usually an earlier rising wave. The "flag" part will be a corrective wave. Both the handle and the flag lie in a big wave. However things are often not so obvious. It depends on how you look at the graph.
- The leaf part in the rising flag pattern must be pointing down. For the reduced flag pattern, the leaf part must be facing up. This shows the correction and pause of the trend.
- If the leaf part of the flag model has a narrow margin, then the accuracy is higher.
- The longer the rolling part of the model, the better the accuracy.
- For the stock market, because a candle is a daily minimum, the flag pattern must be formed in weeks to months. Minimum of 15 days.
- For forex markets a candle can be represented for 1 minute so you can apply it more flexibly. You can apply the flag pattern in 1 minute, 5 minute,… .1H, 4H time frame or week frame…. However, time frames of 1H and above often have better results.
Instructions on how to deal with the flag pattern
Here are instructions on how to trade against Rose flag pattern. In case of reduced flag, do the opposite.
How to enter an order and place a Stop loss with an increased flag pattern
As soon as the price breaks out of the "leaf" of the pattern, you can place a buy order. Place the Stop just below the lowest point of the "flag" section.
If the price continues to move in the same direction, when it exceeds the highest level of the "flag" part, then the pattern is confirmed. By this time it can be said that the probability of going forward is very high. So you put up a second order to eat more. The stop loss of this order should be placed just below the point of Break out.
Refer: How to set Stop loss and Take profit effectively.
How to take profit with an increase flag pattern
As I said above, the flag pattern is usually a period within an Elliott wave pattern. But in the Elliott Wave Model, the latter is usually larger than the previous uptrend. So the price increase after it breaks out of the minimum flag pattern will be equal to the previous flag handle. At this point, you already know where the profit taking is?
Note how to trade when prices break out
Entering orders, setting stop loss and taking profit according to the instructions above are just the most basic. For more efficient and advanced trading, I suggest you read the following article:
Author: Pham Khuong
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