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Pattern Recognition: Flag

pattern recognition flagIn our last article we described the triangle pattern. Another trend following set up that is less common but still a useful strategy for your trading toolbox is the continuation Flag.

Pattern: Flag

The Setup: The flag is a bullish setup like the Triangle pattern. Firstly, the trend must be up; that is, our 30 day EMA (exponential moving average) must be higher today than it was yesterday. The Flag also has 4 internal swings, which help define and differentiate the pattern from lower probability trades.

  • * The first swing high must always be in the direction of the trend.
  • * The second swing is a retracement against the trend.
  • * Swing three retests the swing 1 high but fails to clear that high.
  • * Swing four is yet another retracement against the direction of the trend but swings lower than the swing 2 low. This is where the difference between the flag and the triangle lies.

* Note: Many times a Flag and Triangle may look the same. As the entry method is identical, in theory it is of no concern if you define a Triangle as a Flag or vice versa. So long as the swing count is in place and you are trading a small compact pattern in the direction of the trend, either shape is fine.

Bullish flag:

The reverse is true for a downtrend or bearish flag:

The Entry The entry level, like the Triangle, should be placed at the pattern breakout point, which is the trend line from points 1 to 3. In an uptrend, place a buy stop order 1 cent outside the 1 – 3 line. When prices swing higher, you will automatically be entered into the position. Alternatively in a downtrend, place the entry as a stop sell 1 cent below the 1 – 3 line.

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