The Flag pattern is a continuation model that appears after a strong movement (flagpole), followed by a sideways/tilted correction against the trend in a narrow channel (the flag), before continuing the trend.
How do we distinguish it?
Flagpole: Sharp and rapid price surge with high trading volume.
Flag: A small tilted channel against the main trend (upward in a downtrend or downward in an uptrend), with trading volume declining during the consolidation.
Breakout/Divergence: Price returning to break the channel limit with a noticeable increase in volume in the direction of the original trend.
Types
Bullish Flag: Uptrend ➜ Small downward/sideways channel ➜ Breakout upwards.
Bearish Flag: Downtrend ➜ Small upward/sideways channel ➜ Break down.
Quick Difference: Flag vs Pennant
Flag: Consolidation in the form of a small parallel channel.
Pennant: Consolidation in the form of a small symmetrical triangle.
Both are continuations and come after a 'Pole'.
Common Trading Rules
Entry:
With the breakout above the upper limit of the flag (for the bullish flag) or breaking below the lower limit of the flag (for the bearish flag), preferably with an increase in volume.
Stop Loss:
Just below/above the opposite limit of the flag channel (depending on the direction), or below the last low/above the last high inside the flag.
Targets:
Standard target = Length of the flagpole dropped from the breakout point.
Example: If the length of the pole is 5%, after the breakout we expect an extension of about 5% approximately.
Strength and Weakness Signals
Strength: High volume in the pole + low volume during consolidation + return of high volume at the breakout.
Weakness/Cancelation: Overextended consolidation, or consolidation entering a wide oscillating movement, or breaking the opposite limit before the breakout.
Common Mistakes
Entering inside the consolidation before the breakout.
Ignore the volume.
Consider a very wide channel as a 'Flag' (the flag is relatively small compared to the pole).