Analyzing Chart Patterns: Flags And Pennants

Eventually, the price peaks and forms an orderly pullback where the highs and lows are literally parallel to each other, forming a tilted rectangle.

Sometimes there will not be specific reaction highs and lows from which to draw the trend lines and the price action should just be contained within the converging trend lines. 

You will see the red Flag Pole and the blue Flag channel on the chart. It is so named because the pattern is in the form of a Flag.

What is a Flag Pattern? 

The bull flag pattern is found within an uptrend in a stock. This pattern is named for the resemblance of a flag on a pole. The bull flag is a continuation pattern which only slightly retraces the advance preceding it.

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The Psychology of a Flag Pattern 

The flag and pennant patterns are two continuation patterns that are similar, differing only in their shape during the pattern's consolidation period.

Bullish flag formations are found in stocks with strong uptrends. They are called bull flags because the pattern resembles a flag on a pole. The pole is . The target is approximately as long as the pole of that flag. Always protect the trade by placing a sell on stop order below the low of the pattern. Whereas in a down trend flag patterns are bearish continuation patterns. 

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Trading Considerations

A flag pattern is a trend continuation pattern, appropriately named after it’s visual similarity to a flag on a flagpole. A “flag” is composed of an explosive strong price move that forms the flagpole, followed by an orderly and diagonally symmetrical pullback, which forms the flag. The bull flag pattern is found within an uptrend in a stock. This pattern is named for the resemblance of a flag on a pole. The bull flag is a continuation pattern which only slightly retraces the advance preceding it.

The main difference between the two patterns is the shape of the correction which comes after the Pole. The Flag pattern creates a channel correction, while the Pennant creates a triangle correction. In both cases, though, the potential of the patterns is the same. Since this is a continuation pattern, we look for prices to break higher with a length equal to the size of the flag pole. For the past 3 months, traders have been buying risk .

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