Flag is an extremely important continuation price model that traders should know. This model is easy to identify, even for newcomers but with a very high reliability. There are two types of Flag: Bull Flag (Rising Flag) and Bear Flag (Red Flag). You cannot ignore the opportunity when this pattern appears on the chart.
What is the Flag pattern?
Flag is a continuation price pattern, created when the market moves in one direction and then begins to accumulate in a narrow range. As the name implies, the model consists of two components: the "flagpole" (the initial trend) and the "flag" (the cumulative period). There are 2 types of Flag: Bullish Flag, also known as Bull Flag (Rising Flag) and Bearish Flag, also known as Bear Flag (Reduced Flag) as illustrated above.
Characteristics of the Flag model
Identifying characteristics of the Bullish Flag model include:
- Start with a rally. This part is called the flag pole.
- After creating the flagpole section, the price will move in a narrow range and often drop down. This part is called the flag. Note that the two edges of the flag need to be parallel.
- Note that the flag part should not fall deeper than 50% of the flagpole, ideally should be about 38%.
- A buy signal is given when price breaks above the cumulative channel. Prices are predicted to go up in a direction parallel to the previous flagpole
Opposite are the identifying characteristics of the Bearish Flag model:
- Start with a discount (flagpole)
- After the flagpole section is created, the price will move in a narrow range and often rise (the flag). Note that the two edges of the flag need to be parallel.
- Note that the flag part should not rise higher than 50% of the flagpole, ideally should be about 38%.
- A sell signal is given when the price breaks below the cumulative channel. The price is expected to go down in a direction parallel to the previous flagpole
In fact, this is an intuitive model as the name implies, easily recognizable to the naked eye extremely fast. However, to increase the reliability of the model, we need to look for the following additional factors:
- The flagpole section should have a high slope, maybe upright, then the possibility of the trend going forward will be stronger.
- The narrow flag section is better than the wide flag section.
Psychological evolution of the Flag model
Whether it is a Bullish Flag or a Bearish Flag, the Flag pattern begins with a sharp rise / fall. This implies that a very strong impulse has been triggered and shows that the bulls or the bears have dominated the market. Because the price increases rapidly and strongly, after a while there will be many traders who take profit, resulting in a pause and a slight retreat. Once enough, the buy / sell orders will continue to be added, the momentum will continue to push the price in the direction of going forward.
Target price of the Flag pattern
Trading signals will appear when the price breaks the flag, that is, breaking the resistance line for the Bullish Flag and breaking the support line for the Bearish Flag. The price target moves after breaking the main pattern by the length of the previous flagpole. Thus, the farther the previous trend is, the bigger the price target of the pattern.
Guide to trading with Flag model
This is a model with high reliability, but you need to check that the model has all the elements we listed in the Characteristics section above to increase the probability of success.
Entry point command
For the Bullish Flag pattern, the Rising Flag, we enter the Buy order when the price breaksout (breaks) above the upper resistance line of the flag.
For the Bearish Flag model, the Red Flag, we enter the Sell command when the price breaks below the support line below.
Only identify a break when the candle is closed to avoid false breaks.
How to set a stop loss (stop loss) and take profit (take profit)
A transaction, even if there is a 90% chance of success, obviously means a 10% failure. Therefore, setting stop loss should always be a top priority to be able to protect you if the market has unexpected fluctuations.
Stop loss should be placed below the flag for the Bullish Flag and above the flag for the Bearish Flag.
Regarding profit-taking, we have 2 suggestions for you as follows:
- Quick shortened: The profit taking range will be the width of the flag. That means if at the flag stage, the price moves within a range of about 20 pips, your profit-taking goal will be 20 pips. Normally, after a strong and fast increase / decrease, it is very easy for the market to achieve these profit levels. However, the downside is that profit taking will be equal to the stop loss, the risk / reward ratio is only 1/1.
- Wait and be patient: Calculate the number of pips of the flagpole. Take this number of pips from the bottom of the flag (for Rising Flag) or from the top of the flag (for Falling Flag), you will get the target of profit taking. You can refer to the example below on the GBPUSD chart
We have introduced to you the Flag model (Flag) with 2 types: Rising Flag and Falling Flag. This is a reliable, effective model in many different markets and is particularly easy to identify. Besides, the article also gave examples and instructions for dealing with this model. Good luck!
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Author: Tin Nguyen
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