scorecardresearchNew Investor? Learn what are flag chart patterns and how to trade with them

New Investor? Learn what are flag chart patterns and how to trade with them

Updated: 07 Jul 2022, 01:37 PM IST
TL;DR.
A popular technical analysis tool, flag patterns are formed by price action contained within a narrow rectangle-shaped or a flag-shaped channel. To learn more about it, keep reading.
We explain here flag chart patterns

We explain here flag chart patterns

One of the most well-known chart patterns is the flag pattern, which is created by price activity contained within a tiny rectangle or flag shaped channel. Flags, which are short-term continuation patterns, indicate a brief consolidation before the previous move is resumed.

After a rapid move, the market will consolidate in a small range, creating a flag chart pattern. Typically, a breakout from the flag seems like a continuation of the previous trend. Flags have an extremely high risk-to-reward ratio, resulting in low risk and huge, immediate returns. The flag pattern may be bullish or bearish.

What is a bullish flag pattern?

A technical pattern known as a bull flag offers a reliable way to enter a strong upswing. This continuation pattern is frequently employed by experienced traders to determine the best location for trading with the trend. It appears after a sharp price increase and is indicated by a short pause in the trend. The bull flag chart pattern appears as a downward-sloping channel or rectangle against the preceding trend , marked by two parallel trendlines.

Volume should dry up during its formation throughout this period of consolidation and resolve to surge higher on the breakout. The bull flag gets its name from the fact that its price configuration really looks like a flag on a pole.

READ MORE: What is triangle pattern in technical analysis?

What is a bearish flag pattern?

A bearish flag pattern, which appears when prices are in a downward trend, depicts a gradual uptrend following a sharp decline This suggests that selling pressure is driving prices down rather than up, and it also suggests that the momentum will continue to be in downtrend.

After this pattern forms, traders wait to enter a short position until the price breaks below the consolidation's support level.

After a big downward movement, the success of a bear flag may be higher owing to the potential growth of overhead resistance. Due to the potential absence of underlying support, bear flags might be greater when the swing low that initiates the pattern is also an all-time low.

READ MORE: Doji candlestick pattern: What are the different types?

How to trade using the flag patterns?

When the price crosses the upper or lower flag trend lines, traders can initiate a trade. It develops when there is a rise in supply or demand, which causes the prices to fluctuate up or down. An increase in supply prevents prices from rising in a bullish flag pattern. As a result, the prices might swing lower and create a flag pattern. Price breaks outside the flag just above resistance when demand exceeds supply, and prices continue to rise. A surge in demand prevents prices from falling in the case of the bearish flag pattern. As a result, the prices can increase and create a flag pattern. Price breaks outside the flag just below support when supply exceeds demand, and prices keep falling.

Technical analysis tools like flag patterns are frequently employed by breakout and swing traders. Initially, traders should watch for confirmation of the price breakthrough below the support line of the flag. The traders can put sell orders or go short after confirmation.

 

First Published: 07 Jul 2022, 01:37 PM IST