Flag pattern trading can be a great addition to your trading strategies. Add this technique to your technical analysis arsenal.
There are plenty of technical analysis patterns the traders will come across during trading online. Some of them belong to the group of reversal patterns (like a triangle pattern that can act as a reversal or continuation pattern). But it cannot be ensured that a trader will see it during one session.
Thus, another group, the continuation patterns, is no less important. These patterns can be recognized when there is an uptrend or downtrend and then the asset’s price stops momentarily creating the congestion zone.
This happens because there is a temporal balance between sellers and buyers. And in this congestion zone, the price may fall into some patterns that suggest that the previous trend most likely will continue after the price breaks the patterns.
A flag pattern is one of such continuation patterns that will appear after a sharp rise or fall in the asset’s price. It is considered to be a reliable one, therefore it will be good to know more about it so you can successfully trade flag patterns on IQ Option. With flag pattern trading in a strong trend environment can be much easier. This particular form of market consolidation in a trend helps to easily identify the exact place to open a position.
How do you identify a flag pattern?
The flag pattern is also known as a rectangle pattern. It is because it resembles a rectangular flag. It develops around the center of the trend and starts with a sharp rise or fall in the price. When the price comes to a halt and moves within a certain range, it creates a pattern that looks like a rectangle-shaped flag.
We distinguish a bearish flag pattern and a bullish one. It depends on whether it develops during the downtrend or the uptrend. As it is a continuation pattern, it signals that the downtrend or the uptrend will soon continue.
It is possible to draw two parallel trend lines in the consolidation zone. You just connect the lows and highs and you will get a flag pattern. Typically, the flag is gently inclined upwards in case the pattern develops during the downtrend, and downwards when it appears during the uptrend.
You can find the flag pattern on any timeframe but it is not something that you can observe every day. Once the price breaks the pattern, it proceeds in the previous direction rapidly. The asset’s price abandons the flag pattern above the upper trendline in case of the bullish pattern, and below the lower trendline for the bearish one.
To predict how far the price will rise or drop from the breakout, you must calculate the height of the flagpole. What I called “flagpole” is a strong up or down movement which precedes the appearance of the flag pattern. So if you will find a potential flag pattern, for example on the 1-minute chart, it can be a good idea to open option trade with a higher duration like 5 minutes immediately after price breaks the flag boundary.
Principles to check before you assume it is a real flag pattern
- The price is dramatically rising or falling prior to a flag creation.
- During the development of the flag, the volume increases.
- The volume decreases when the asset’s price falls into the consolidation zone.
- There is a steep rise or fall in the price once it breaks out of the flagpole.
Flag pattern trading explained
The first step is done, the flag pattern was recognized. There was a sharp uptrend, then the price began to fluctuate within a certain range and finally it is breaking the pattern. This is a moment to enter the trade.
Analogically, when you notice the downtrend and it is a steep one, then the price stops and ranges creating a flag, you can expect it will break the pattern soon. And when it happens, you open a sell position.
Be aware of the news release that might affect the movement of the price. Always check the latest news and be ready to react.
|How to Trade Flag Patterns
|Identify the flag pattern
|Look for a sharp trend, followed by a consolidation zone with parallel trend lines
|Confirm the pattern with volume
|Increased volume during the trend, decreased volume in the consolidation zone, and increased volume after the breakout
|Watch for the breakout
|Enter a trade when the price breaks out of the flag pattern in the direction of the previous trend
|Set stop-loss and take-profit levels
|Use the height of the flagpole to estimate the potential price movement after the breakout
|Stay informed about news releases
|Monitor market news that could impact price movements and adjust your strategy accordingly
How reliable is flag pattern?
Flag pattern trading looks like an easy way to trade. And indeed it is. Flags work in most markets and on different time frames. You can successfully use them for scalping, day trading or even swing trading. Of course, there are no tools in technical analysis that are 100% effective. That is why it is worth ensuring that the played flag patterns are of good quality, i.e. they meet all the key principles for this pattern.
The flag pattern is helpful in forecasting the continuation of the trend. It may take some time to practice using it, but with the hints presented above, it will not be a hard job.
If you are interested in patterns that can improve your trading achievements, check the following article about price action as it is strongly connected with technical analysis patterns. Do you have any experience with flag pattern trading? Share them in the comments section.
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