We always use a hard stop-loss order with this type of trade.
One the flag formation completes the stock should exhibit strong volatility and resume movement in the direction of the trend. Do not take signals counter to the trend in these scenarios no matter how appealing they look visually. The flag pattern is a pure continuation pattern; therefore all signals have to be taken in the direction of the main trend. Here is another example of Google forming a bullish flag pattern after a strong upwards move that lasted one straight month.
The flag pattern should take about one third or one quarter of the time to form compared to the trend preceding the formation. One of the benefits of trading flag formations is having to wait less time than formations such as triangles and wedge patterns. When stocks breakout from flag patterns, they should demonstrate increase in volatility and momentum back in the direction of the trend. Sometimes you will have other events such as news or other important announcements that coincide with the breakout of the flag pattern.
The stock should begin moving similarly to how it moved prior to entering the flag pattern in the first place. You want to money flowing back into the stock with very little movement going against the main trend.
The bearish flag pattern is exactly the opposite of the bullish flag pattern. The trend has to move down for a substantial amount of time prior to the formation of the flag pattern. Flags and pennants are short-term congestion patterns one to five weeks that form in trends. They represent pauses while a trend consolidates and are reliable continuation signals in a strong trend. A flag is formed when parallel lines can be drawn through the peaks and the troughs in a correction or a rally during a down-trend.
The lines slope counter to the direction of the trend. The pattern is completed by a break outside the parallel lines. Jack Schwager Schwager on Futures - Technical Analysis says that he finds flags that slope in the direction of the trend rather than counter to the trend just as reliable.
There are many traders who would not agree with this. ANZ is in the middle of a strong up-trend. Two flags are marked on the chart. Lines through the peaks and the lines through the troughs are parallel and counter to the direction of the trend.
Pennants are really short-term triangles. They form with lower highs and higher lows, over one to five weeks. The line through the peaks and the line through the troughs converge and the pattern is completed by a break outside the converging lines.
Cellestis Limited Australia illustrates a pennant during a recent up-trend. The upper and lower lines converge to form a short-term triangle, completed by price gapping above the upper pennant line. Volume normally expands at the start of the flag or pennant, contracts as the pattern develops and then expands on the breakout. In an up-trend, the targeted move is measured from the start point of the trend the breakout point at the base of the trend or most recent congestion pattern to the highest high recorded in the flag or pennant pattern.
The move is then projected up from the point of breakout from the flag or pennant pattern , to arrive at the target. In a down-trend, the targeted move is measured from the start of the down-trend the breakout point from the reversal or most recent congestion pattern.
The distance is calculated to the lowest low recorded in the flag or pennant pattern and then projected down from the point of breakout from the flag or pennant pattern.
A The first school will enter a trade at the point of breakout and place a stop-loss one tick outside the opposite trendline. In an up-trend, the trade is entered on a break above the upper flag or pennant line. To form the pattern, the price rises substantially in a short period of time and then consolidates for generally a few days to a few weeks to form the flag portion of the chart pattern.
A true bull flag pattern often leads to a secondary move of similar magnitude. A lot of traders use the bull flag pattern interchangeably with the term flag pattern. However, a bull flag or high, tight flag as its sometimes called is actually a very bullish subtype of the flag pattern.
Anything less than that and you have a less bullish flag pattern. Bull flag patterns are generally much more bullish than simple flag patterns. Because the stock has already proven that it can make a huge move in a short period of time. Plain flag patterns are less reliable chart patterns and we definitely need a strong uptrend leading into the pattern to peak our interest. Both patterns tend to fail during market downtrends and after the market has generated a bearish market signal.
So we definitely tend to avoid these chart patterns during market corrections and bear markets. We only focus on bull flag patterns where the fundamentals of the company are also trending much higher.
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