Most traders can accurately predict the length of a trend through bullish or bearish continuation patterns. It is usually shown on the chart as a very distinguishable pattern and is known as the Flag pattern.
Accompany me to learn about the Flag pattern and how to trade effectively with it in this article.
What is the Flag pattern?
The Flag is one of the popular patterns in Forex trading. It signals a continuation of an uptrend or downtrend. Many professional traders use it as a reputable signal to enter orders.
The pattern consists of two parts including the flagpole and the flag. There are two types of Flags – Bullish Flag and Bearish Flag.
Bullish Flag pattern
With a Bullish Flag pattern in an uptrend, the flagpole will be a bullish candle, followed by the flag part. The price rises from the bottom and fluctuates in a channel created from 2 parallel support and resistance levels.
To identify the bullish flag, you can rely on the following features.
- The pattern will start with an uptrend.
- Once the flagpole has formed, the price tends to move in a small range and often falls slightly. This part is called the flag. In the pattern, the two edges of the flag need to be parallel.
- In a standard bullish pattern, the flag should not fall below ½ of the flagpole.
- If the price breaks above the accumulation channel, traders can take this as a buy signal.
- At that time, the price often tends to move parallel to the direction of the previous flagpole.
Bearish Flag pattern
The Bearish Flag pattern in a downtrend has a flagpole as a bearish candle. This is followed by a slight upward short-term retracement channel that doesn’t exceed the resistance level. It can also fall slightly but couldn’t break through the support level. Until the price breaks the lower support level of the pattern, the price will continue to plummet.
If you want to identify a bearish flag, you should compare the following features.
- Starting from a price drop, the flagpole part is formed.
- When the flagpole has officially formed, the price usually moves in a narrow range and tends to slope upwards. The two edges of the flag should now be parallel to each other.
- In a bearish pattern, the flag part should not rise more than ½ above the flagpole.
- If the price breaks below the accumulation channel, traders can see this as a sell signal. Next, the price is predicted to move down parallel to the direction of the flagpole just formed.
The bullish and bearish flag pattern both represents the internal resources that are activated. Both buyers and sellers have started entering, causing the market to move sideways in a short time. Most of the time, when seeing an increase or decrease in value, it is necessary to withdraw or suspend trading. When the price accumulates enough, continue to add sell or buy orders.
The flag is the trading signal that usually appears right at the breakout time. It’s when the price moves sharply away from the resistance level in a bullish pattern, or penetrates the support level in a bearish pattern.
The larger the previous trend, the bigger the pattern’s price target. The pattern works better when the retracement channel takes place in less than 15 candles.
How to trade with the Flag pattern
The Flag will have a different strategy than other patterns. The price rarely pulls back, which means that once one of the two sides is broken, the price will continue to follow the preceding trend instead of retesting the trend line.
That’s why this pattern usually forms in a short time, unlike other patterns.
With the Bullish Flag, we will enter an order as soon as the price breaks the resistance level as shown below.
– We will place the stop loss at the price range that touches the nearest support level.
– Take Profit will be from the entry point to 2 times the distance from the entry point to the stop loss.
With the Bearish Flag pattern, we also enter the order as soon as the price penetrates the support level.
– Stop loss is the point where the price touches the nearest resistance level
– Take Profit is 2 times the distance of the stop loss calculated from the entry.
Things to keep in mind when trading with the pattern
To make good use of the flag pattern, you have to see the process ahead of it. If you follow the Elliott wave principle, the flagpole is usually a previous bullish wave. The flag will be a correction wave. Both of them are in a big wave.
The flag in the bullish pattern must be pointing down. For the bearish one, the flag must be pointing up. This represents a correction, a pause of the trend.
If the flag part of the pattern has a narrow margin, it will have higher accuracy.
The longer the pole of the pattern, the higher the accuracy.
Do not enter the order if price movements are not strongly supported by trading volume. With little buying power, it is easy to fall into the traps of the market, thereby making the wrong decisions.
It is recommended to use additional tools such as the Relative Strength Index (RSI) to measure the strength of price changes
Thus, we have shared with you information about the Flag price pattern. Hopefully, with this article, you will somewhat understand some ways of trading with the pattern in Forex. Remember to learn more knowledge about Forex every day to improve your trading skills.
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