A flag pattern belongs to the group of continuation patterns. This means that the trend is likely to continue. Such patterns appear when there was a downtrend or uptrend on the market, and at some point, the price pulls up and create a congestion area. This happens due to the temporary equilibrium between the bulls and bears.
Another group of the patterns can be named as reversal patterns. They inform about the impending change in the price direction. A head and shoulders pattern is one of those.
But today, let’s focus on the first group, the flag pattern in particular. It can be observed right after a sudden fall or rise in the price. The signals produced by it are believed to be strong and that is why the flag pattern is worth knowing.
How to identify the flag pattern at Olymp Trade
I mentioned that the flag pattern occurs after a sudden fall or rise in the asset’s price. The price then stops and oscillates within a specific range. It is possible to draw a rectangular shape over it, thus another name, a rectangle pattern. After a while, the price breaks out from a flag and undertakes the previous direction.
The rectangle is formed by drawing two parallel trend lines. You draw them by connecting a few highs and lows. Often, you will notice that the flag you have received by drawing a rectangle is inclined slightly in one direction. It will be inclined upwards when the pattern emerges in the downtrend, and downwards in the case of the uptrend.
Two types of flag patterns
When the rectangle pattern is formed during the uptrend, it is called the bullish pattern.
The bearish flag pattern develops during the downtrend.
Both belong to the continuation patterns group and as such, imply that the trend will be soon continued. The bullish pattern suggests the uptrend will be adopted, and the bearish one informs about downtrend continuation.
The price moves in a consolidation zone for some time, just to break out from a rectangle and continue the previous trend. This breakout will be noticed over the upper trendline during the uptrend, and beneath the lower line in case of the downtrend.
You can estimate how far the price will fall or rise after the breakout. To do this, you must determine how high is the flagpole. The flagpole is created by the sharp movement of the price just before the pattern’s development.
You will not see this pattern on a daily basis. But it can appear on any timeframe. If your chart is set for 1-minute candles, you can open the trade based on the flag pattern for a duration of 5 minutes. You enter the position just after the breakout.
Conditions for the flag pattern to exist
When you notice the flag pattern, you must ensure all the below conditions are met.
- There is a sudden fall or rise in the price just before the pattern forms.
- Once the price starts to consolidate in the specific zone, the volume decreases.
- After the breakout from the rectangle border, the fall or rise in the price is sharp.
Using the rectangle pattern on the Olymp Trade platform
Now you know how to identify the pattern. You must observe a sudden rise in the price, then momentary consolidation and break out afterwards. At this point, you should be ready to open a buy position.
During the downtrend, you ought to wait for a sudden fall in the price. Then it should fall into a consolidation zone just to break out of the rectangle soon after. This is the right time to enter a short trade.
The flag pattern helps to predict the trend continuation. Remember to check if all the conditions are met so you do not enter the trade mistakenly. You are more than welcome to use the Olymp Trade demo account to practice using the flag pattern in trading.
You should follow the economic calendar to be familiar with the scheduled news releases. They may affect the market in a significant way. You should avoid using patterns if this is the case.
Do you want to read more about technical analysis patterns? I recommend the article on the price action. You can get better trading results with this method.
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