Pattern Recognition for Technical Analysis: Flag

Recognising the flag pattern in technical analysis

In our series on pattern recognition, in the 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.

Learn more in Building a Profitable Trading Plan Using Technical Analysis course provided to members of The Chartist within the Education section. Click here to get started

In our next article we’ll discuss Smash Bars.