As the name suggests, a flag pattern is a pattern that occurs due to price changes in financial assets such as forex, stocks and crypto assets. If the highest price point and the lowest price point are connected. The resulting pattern is similar to the image of the flag.
According to Gordon Scott on the website InvestopediaThis pattern is formed because in the short term there is a possibility that the price will move in the opposite direction of the previous trend. This can happen because the market has been consolidating for some time. It is called the flag pattern because the shape is reminiscent of a flag attached to a pole. This format consists of 2 types: bullish flag and vulgar flag
Although they are quite simple and easy to identify. But the formation of this pattern can indicate a change or continuation of the future trend of the asset price. Take a look at the full discussion below:
bullish flag pattern
The bullish flag pattern is a flag-shaped price pattern formed after an upward price trend. At the beginning of the formation of this pattern Trading volume will decrease. But over time The volume will increase again and will eventually meet a breakout.
This happened because after a long-term price increase, sales force began to dominate the market Therefore, the price of the asset will initially decrease. But before the price breaks out of the support, it turns out to be buying power of traders come back to push prices up
speak broadly This pattern indicates continuity (Continuity) from the prevailing trend. A bullish flag can be shaped like a downward sloping square box. or a relatively flat rectangular box depending on market conditions at that time Note that the two lines that make up the flag always move in a rectangular shape. instead of a triangle like pattern pennant.
bullish flag example
In the picture above, the prices of these assets can be seen rising rapidly (the flagpole) before finally going through the consolidation stage. during consolidation The volume appears to have dropped significantly following the price action.
A bullish flag pattern is formed if the resistance and support move in the same direction and have the same slope. In the picture above, the resistance and support, both falling and steep, are not much different.
Bearish Flag pattern
The opposite of the bullish flag pattern is the bearish flag pattern. The bearish flag pattern is a flag-shaped price pattern that indicates a potential decline in the price. This pattern is preceded by a long-term downward price trend experienced in consolidation.
That is, after a long decline Buying pressure began to take over the market. Therefore, the prices and volumes of these assets start to increase. (default model) However, the increase in price and quantity did not last long because sales force will take over and the price of the asset will drop again. (end of pattern)
in the form of a bear flag Resistance and support appear to rise with the same slope. before finally dropping again for more details Take a look at the following pictures:
Bearish Flag Example
In the picture above, it can be seen that after experiencing a long downtrend, The price of this asset has increased slightly. Until a certain point in time, the price will continue to decline.
Can a Bearish Flag be Bullish and vice versa?
as mentioned above The flag pattern typically forms when the market is consolidating. This means that at this stage Buying and selling pressures are equally strong, so it is possible that in the end the formed pattern will not continue from the previous price trend and reverse instead. Moreover, traders do not yet know how this pattern will complete. when
Another disadvantage of this format is the fact that it is Lagging indicatorThat is, the price movement of an asset can be identified as a flag pattern only if the pattern is complete. So, you need to trade using this pattern carefully so that you don’t make any mistakes.
How to trade using the Bullish & Bearish flag pattern
Taking a position when the market is consolidating (sideways) is very risky. as it is prone to erroneous signals. So you should wait for it to take shape. false breakout (for vulgar patterns) and error details (for bullish pattern) to open a long position.
Profit targeting using the flag pattern is quite simple. First you need to draw a flagpole (flagpole) First. After that, move the flagpole line you drew earlier to the right until it touches the breaking point and draws parallel lines. The top point of the line will be your target profit point. The bottom of the line will be your profit target when you find a bearish flag.
mathematically Your profit target can be set in 3 steps:
- Set the base price and the highest price in front of the flagpole.
- Subtract the highest price from the base price.
- Add a drop in the second point to the detail price level. (If it’s an uptrend)
For example, the lowest price on the flagpole is 5,000, while the highest price is 6,000 rupiah, and the split occurs at the price level of 5,500. Knowing the price level, 6,000 minus 5,000, the result of subtracting (1,000) is added to 5,500, so the price. The target for taking profit is when the asset price reaches 6,500.
for the stop loss level Traders usually install this level at different points. below the resistance line, so when the price trend reverses In the event of a downtrend (no longer bullish), the system will automatically sell the trader’s assets to avoid deeper losses.
Differences between flag patterns with wedges and pennants.
There are two price action patterns that are similar to the flag pattern: the wedge and the pennant. These three patterns are formed by support and resistance movements for the price of the asset. The difference lies in the degree of slope of the line.
In the flag pattern, the slopes of the two lines are relatively equal and parallel. In a wedge pattern, one line is more oblique than the other. while the pennant pattern The slope of the line is relatively equal. But the two lines appear to dive (converge) to form an equilateral triangle.
Traders need to know this difference so they can be cautious. This is because the wedge pattern indicates a potential reversal. This is different from the flag or pennant pattern.
Because there is a possibility that the price will not move in the expected direction and a new pattern can be identified after it has fully formed. Traders should not use this pattern as their only primary trading indicator (blank chart trading). Traders can use statistical technical indicators or other price patterns with more advanced characteristics. leading indicators for correct trading decisions
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