Flag Chart Pattern

Flag Chart Pattern

Flag Chart Pattern

When a trader looks at a price chart of a stock it can appear to be full of completely random movements. Even though this is sometimes true, within those price movements there still exist some patterns that can help us understand what’s going on. Chart patterns are geometric shapes found in the price data that can help a trader understand the price action, but they can also help him/her make more accurate predictions about where the price is likely to go. In this article we will show you one of the most important continuation patterns: the flag chart pattern. Keep reading!

Flag Chart Pattern | Continuation Patterns

Before explaining flag chart pattern, we would firstly like to explain what continuation patterns are in general. Continuation pattern is a technical analysis pattern that suggests a trend is exhibiting a temporary diversion in behavior and will eventually continue on its existing trend. These patterns will probably be the most accurate when the trend has existed for around one to three months. A pattern is considered complete when it forms and then “breaks out”, potentially continuing on with the former trend. Common continuation patterns are triangles, pennants and flags. Of course, when conducting your technical analysis don’t rely on just one tool – Fractals, oscillators and other indicators can help you a lot.

Flag Chart Pattern | Flag Chart

The flag chart pattern forms what looks like a rectangle. The rectangle is formed by two parallel trend lines that act as support and resistance for the price until the price breaks out. The flag probably won’t be perfectly flat, but will have its trend lines sloping. The slope of the flag chart pattern should generally move in the opposite direction of the initial sharp price movement. If the initial movement were up, the flag should be downward sloping. If you would like to see how this type of pattern looks for real, you can always check out some chart examples of flag patterns.

As a continuation pattern, the flag chart pattern is also defined by the pattern that will move in the same direction with the prior trend. The actual pattern, on the other hand, will be considered consolidation. This area of consolidation is crucial in determining future price action. In terms of the Elliott Waves Principle, flag chart patterns are always formed as corrective waves.

When it comes to time frames, these patterns can help a lot if the time frame is bigger. It is a continuation pattern, so if price breaks the flag on the upside, we should look to invest in call options, and if the price breaks the flag on the downside, we should invest in put options.

Flag Chart Pattern | Conclusion

As already said, there are a lot of tools that can help us to understand the market and price movements, and one of the most common techniques are continuation patterns. Flag chart pattern belongs to that group of patterns. It’s quite common, so investing some time to master it certainly seems like a good idea. Flag chart patterns can help you especially if you trade with bigger time frames. Learn how to handle a flag chart pattern and improve your trading skills!

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FURTHER READING:

1. Japanese Candlestick Charting Techniques (S. Nison, 2009)
2. Charting Made Easy (J. Murphy, 2000)
3. The Little Book That Beats The Market (J. Greenblatt, 2006)
4. Information-Based Stock Trading, Executive Incentives, and the Principal-Agent Problem  (Qiang Kang,  Qiao Liu-2010)
5. The Ultimate Trading Guide (J. Hill, G. Pruitt, L. Hill, 2010)

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Author: Ben Prescott
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