The Flag is a trend continuation pattern that gives you the opportunity to enter the market in the middle of a trend.

The Flag pattern occurs when a sharply trending price suddenly pauses and retraces slightly in a rectangular range. It then breaks that range and continues in the original direction, giving you the opportunity to enter the second half of a trend at a better price than before the flag formed.

It occurs when the price of an asset moves up or down in a strong trend that suddenly pauses.

The price then trades roughly sideways in a fairly narrow range, often moving gently in the opposite direction to the original trend. Two trend lines marking the top and bottom of that range now give the pattern a sloping, rectangular shape – rather like a flag.

The price eventually breaks out of the flag and continues its original strong trend, giving you the chance to enter that trend at a slightly better price than before the flag formed.

As with most patterns, there is a bullish and bearish version of the Flag.

How to identify bearish or bullish Flag patterns

See the price chart below to see what a bullish Flag pattern looks like:

Flag1

As shown above, the price experiences a strong uptrend but then consolidates into a rectangular range that gently slopes downwards.

It then breaks out of that range and the uptrend resumes.

See the price chart below to see what a bearish Flag pattern looks like:

Flags2

Try the following exercise to practise identifying the Flag pattern:

Exercise 1: Find the Flag pattern in the following chart Show exercise

How to trade the Flag pattern

We will use a bullish Flag in the following example. To trade a bearish Flag, simply invert the pattern and your orders.

Enter your trade

Wait until the price has broken out of the Flag's upper trend line in the direction of the original uptrend.

Place a long (buy) entry order once the candle that has broken out of the flag pattern has completed.

See the chart below for an example of this:

flaglongentry

el1 Entry

Place your stop loss

Place your stop loss where the Flag's lower trend line reaches its lowest point.

See the chart below for an example of this:

flaglongstop

el1 Entry
sl1 Stop loss

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Place your profit target

Calculate how far the price rose in its initial uptrend – this is sometimes known as the flag's 'pole'. Then place your profit target the same distance above the point where the Flag's lower trend line ends.

See the chart below for an example of this:

flaglongtarget

el1 Entry
sl1 Stop loss
tp1 Take profit
Height of number_1 is the same as the height of number_2

Bearish flag

To see where you would place your entry, stop loss and take profit orders if a flag formed during a downtrend, look at the chart below:

Flagshort

es1 Entry
sl1 Stop loss
tp1 Take profit
Height of number_1 is the same as the height of number_2

Try the following exercise to practise placing your entry, stop loss and profit target:

Exercise 1: Place your entry, stop loss and profit target Show exercise

Summary

In this lesson you have learned that ...

  • … the Flag is a continuation pattern that gives you to the opportunity to enter the market in the middle of a trend after the price has temporarily paused and moved slightly against the original trend.
  • … this means that you can enter the trend at a better price than before the Flag formed.
  • … there is a bullish and a bearish version of the Flag.
  • … to trade a bullish flag pattern, wait for the price to break out of the Flag's upper trend line in the direction of the original uptrend and place a long (buy) order here.
  • … place your stop loss at the level where the Flag's lower trend line reaches its lowest point.
  • … calculate how far the price rose in its initial uptrend, then place your profit target the same distance above the level where the Flag's lower trend line ends.
  • … to trade a bearish Flag pattern, simply invert the pattern and your orders.

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  • I was having a live course at one of my local brokers, and there was another flag pattern explanation.

    They said that after the big bullish/bearish candle there have to be 3-7 candles that form the flag. And that usually more than 7 candles do not make the perfect flag and the momentum is gone. Is there anything true in that theory?

    Thanks
  • On a philosophical level it doesn't sound too reasonable to me... If you switch to lower timeframe the momentum goes because the candles have doubled, trebled? Who's to say which is THE TIMEFRAME for a flag? biggrin
  • Does the flag have to be moving slightly opposite in the direction to the trend to be a flag? What if it just ranges in a straight line, or it slows down and is in the direction of the trend are those called anything?

    Edit: dw I just read bullish and bearish rectangles lol
  • Hi Pockettones,
    You can say that a bullish/bearish rectangle is a special form of a flag, but typically flags always go in the opposite direction.
    Regards.
    Peter
  • Hello tradimo team,
    Thanks for your usual support. I have 2 questions please.
    1. What if the upper trendline of the flag is straight (the resistance) and the lower one slopes upward, in the opposite direction of a bearish flag?
    2. What if the flag is a bearish one and the flag is broken to the opposite direction (upwards). Is the flag still considered as a valid one and am i supposed to trade LONG? is the profit target also going to be the same as the length of the pole?
    Presently as i'm typing here, i've identified on my chart, a bearish flag pattern with a long pole of 240pips has formed and broken the support on EURUSD (H4, H1, M30 and M15). Same on AUDUSD. But the flag on EURUSD is as i described above. Please guide me. Thanks in anticipation.
  • Hi Murysco,
    To answer your questions:
    1. In this case we are talking about an ascending triangle
    2. In that case it is a failed flag and cannot be traded on the principles of the flag pattern. Technical patterns are not 100% reliable and often fail.

    I don't really see a flag on the EURUSD 4H, 1h, 30m. Maybe there is something on the 15m but that is not a flag (for me). Maybe you could take a screenshot and link it in?

    Same goes for AUDUSD. 15m is more like a pennant.

    AUDUSD, 15m
    http://prntscr.com/7doq6n

    Regards.
    Peter
  • thanks for your quick reply. How do i go about uploading a screenshot here?
  • Under lessons you can't display photos so you need to upload it somewhere, like tinypic and just link it in.
  • Here are the screenshots of what i saw as flags on EURUSD M15, M30 and H1 plus AUDUSD respectively.
    As it is, the size of the candles are compressed on the higher timeframes but they still reflect the same values.

    http://prntscr.com/7dp6yj M15 EURUSD

    http://prntscr.com/7dp7yh M30 EURUSD

    http://prntscr.com/7dp8kq H1 EURUSD

    The flag shape differs a little on the M5 TF. Here is what it looks like. http://prntscr.com/7dpa7c

    Also, the AUDUSD:

    http://prntscr.com/7dpbzm H1 AUDUSD

    http://prntscr.com/7dpcha M30 AUDUSD

    http://prntscr.com/7dpcx9 M15 AUDUSD

    Let me know what you think of them. Thanks for your support.
  • Regarding the Euro i would be hard pressed to call it a flag. If you look in the lesson above (where we put textbook examples and in reality they are not always this nice) you'll see that flags look like flags. Parallel or almost parallel lines make a flag. The AUSDUSD one is a pennant in my opinion, but the Euro is just a correction and very subjective to see anything in it.
  • Thanks a lot. I appreciate your effort
  • Hello Hindsighthero, i'm back again to bother you with my questions, hope you'll bear with me.
    I think the EURUSD is worth looking at closely cos if you look above the pole of the flag, a head and shoulder pattern has formed and broken to form this long pole (H1 and H4), which indicates the beginning of a downtrend, according to the studies i've had on TRADIMO.
    There's this image i screenshot from head and shoulder lesson in this site, the picture is almost a carbon copy of the EURUSD chart as it is now. The only difference is that EURUSD has not dropped yet from the flag. Take a look below:

    http://prntscr.com/7drbv3 tradimo lesson chart.

    http://prntscr.com/7drf28 EURUSD (Carbon copy).

    Don't you think it is the same occurence?
  • Sorry, its a pennant not a flag.
  • we can also wait for retest of resistance or support levels with this pattern, correct?
  • Hi Grungeboy,
    You mean a breakout and a retest or a bounce inside the pattern? In these cases yes, traders often do wait for a successful retest for added confirmation.
    Regards.
    Peter

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