The flag formation is a reliable chart pattern that provides two vital signals: direction and price objective. This formation consists of a brief consolidation period within a solid and steep upward trend or downward trend. The consolidation itself tends to be sloped in the opposite direction from the slope of the original trend, or simply flat.
There are many different patterns that traders follow to help time entries and exits. Flag means? You understand flag, same like cloth piece and a pole.The flag pattern is fairly simple with just three components.
- The flag pole
- The flag
- A strong up trend
First identify an instrument in a strong up trend (flag pole). Through the duration of this uptrend, eventually prices need to rest and consolidate those gains. This price consolidation becomes the ‘flag’ of the pattern. The flag portion of the pattern tends to be a gently downward sloping price channel.
Additionally, this consolidation will retrace a small portion of the previous up trend. If the retracement becomes deeper than 50%, it may not be a flag pattern. Ideally, we’ll see the retracement be less than 38%. Since this is a continuation pattern, we look for prices to break higher with a length equal to the size of the flag pole.
