Chart Patterns
Flags
Unlike reversal patterns, continuation patterns often form in a short period of time and in a small trading range. Flags are a type of continuation pattern and if correctly identified, can provide a trader a valuable insight into the movement of a security.
Flags can be found in strong established trends and when completed will often lead towards the trend continuing in the same direction. Flags are so named as their appearance resembles a small flag flying on a pole. One of the characteristics of flags is that they normally only cover a small price range.A flag in an uptrend will form when the prevailing trend temporarily gives way to supply causing the movement upwards to halt. The demand for the security will form the lows in the flag that when connected will form a line parallel to the highs, as seen in the chart above. Eventually, the resistance is eroded away and this results in continued higher prices and a continuation of the trend. It is the break out that completes the flag.
Volume can also be used as a confirmation tool for a flag. Volume will normally increase as the flag is forming but then decrease as the security trades within the flag. Volume will then normally increase again as the security breaks out from the flag.A suggested trading strategy might be to initiate a buy when the security trades out from the flag, i.e. when it establishes a high above the previous highs that form the top part of the flag. An initial stop would ideally be placed on the other side of the flag. The opposite is true for going short. You could initiate a short trade when the security trades down below from the flag, i.e. when it establishes a low below the previous lows that form the bottom part of the flag. Similarly, an initial stop would ideally be placed on the other side of the flag.
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