One of the most commonly followed chart patterns is the Flag pattern. The flag pattern is normally a resting phase of a longer running trend. The flag by its very definition is a continuation pattern, meaning that if the previous trend is up, the expected move is up. It also works in reverse as there are also inverse or “upside down” flags as well.
In order to form a flag, you need two parts: the pole and the flag itself. The pole is simply the previous trend. The pole should for the most part be a one-way rise or fall in the price of a currency pair, and should be extended. The flag is the resting area that has markets going sideways after the long run. When looking at the chart below, it is easy to see why traders call this a flag pattern:
When the flag has presented itself at the end of the pole, the most common way to trade the pattern is to enter on a break above the top of the flag. (In the case of an inverse one – the bottom.) This signals that the buyers have started to move prices forward again after their break. There are several different things to consider when trading this pattern:
Price was trending in an explosive move, take advantage of it by following the trend
The flag is not confirmed until price breaks out of the flag itself – in the same direction of the previous trend
The final target is quite often the length of the pole itself added or subtracted in a downtrend to the price at the breakout of the flag
While there are numerous variations on trading these patterns, the one thing that makes them so valuable is that most traders recognize the pattern. Because of this, they can be a bit of a self-fulfilling prophecy. In longer-term trends, it is quite common to see several flag patterns during the length of the trend.
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