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Chart Patterns – Bullish Flag
Chart Patterns – Bullish Flag
The Bullish Flag Pattern is a continuation chart pattern, and is considered as one of the most powerful and consistently reliable patterns in trading. It is a continuation pattern that represents a brief pause within an already existing uptrend and typically occurs in the middle of a large rally.
This is the general appearance of the pattern. The first part of the formation is the “Flagpole.”
It is the key characteristic of this formation and it is formed initially by a strong and continuous price action in one direction.
There are no significant retracements during this time, thus giving the appearance of a straight “Flagpole”.
The Flag pattern forms on top of the Flagpole when the initial demand slows down. Price moves gradually downwards but in a steady trading band. This band is usually a channel with parallel sides. Once the upper trend line has formed along a minimum of 2 lower highs, we plot a parallel line on the most recent low in the emerging pattern, thus giving us the Flag pattern. On confirmation of the pattern we should enter a trade when price break out of the upper trend line, in the direction of the previous trend. The ideal place for a stop would be just beneath the lower trend line, thus giving the price enough room to move within the bounds of the pattern. We do not want to be stopped out before the pattern develops fully. The pattern would stand negated if price closes below the lower trend line or if the price consolidates within the channel for a considerable amount of time. Once in a trade, this pattern gives us an exact target. To calculate the potential target we measure the height of the flagpole. This distance is then projected upwards from the point where price breaks out of the upper trend line. This gives the minimum target, which in most cases is exceeded. When the breakout occurs, price should move with a lot of momentum and approach the projected target rapidly.
In this chart example we have marked the initial Flagpole in blue where price rallies strongly without any major retracements.
After forming a top, the price starts moving down gradually in a channel forming the flag pattern.
Once we have this formation and price starts to rise to the upper trend line we should start preparing for the trade.
We enter the trade on the breakout of the channel and place our stops beneath the lowest low of the channel. We then calculate our target by the length of the Flagpole added to the breakout point of the channel. As we can see, price rallies again with a lot of momentum and reaches the calculated target. Thus this pattern offers a reliable, high-probability trade with good returns and easy trade management. You could also use your favorite indicator to help confirm that the breakout is real. In the example above you can see that the MACD gave a buy signal around the same time as the breakout. This gives even more confirmation that the breakout is real.
Good Trading
Mark McRae