So I’ve decided to do a series of posts focussing on the chart patterns I try to look out for every day in my nightly analysis of the UK stock market. To kick things off we will have a look at the flag chart pattern. Take a look at the chart below:
From this, we can discern that:
- This is a bullish flag i.e. a flag within an established up trend
- The flag chart pattern is a continuation pattern
- The flag pole formed with an explosive move in price accompanied by heavy volume
- The flag shape caused by the price action slanted against the trend
- The flag pole is represented by the huge one day price move
- Volume declines after the flagpole during the formation of the flag itself
- The best way to trade the flag chart pattern is a break above resistance (the top line)
Here are some more flag chart patterns:
- Some flags can be elongated or short in length
- An extended flag is technically a rectangle and a different chart pattern altogether
- Looking at both the BT and BAE charts, it appears that the length of the flagpole is an approximate distance to judge the advance of the price after the breakout
The land securities chart above shows a classic example of a bearish flag chart pattern in a down trend. You can see that the flag itself slants away from the trend, just as it does for bullish flags. Also like bullish flags, bearish flags can appear just after a change in price direction and with increasing volume.
Usage Of The Flag Chart Pattern
I use the flag chart pattern as an entry into a strong shares; those that exhibit explosive price action. Because they are continuation patterns, the best place to find flags are just after a change in the direction of price. So if shares have been falling for weeks and months (as is the case now) then you will find that when the trend changes direction, flag chart patterns will pop up all over the place, but only in the strongest shares i.e. those exhibiting very sharp/pronounced price moves accompanied by increasing/heavy volume.
OK. Time for you to get thinking
I am going to pose a question and would like you to tell me your answer using the comments/leave a reply form below. The question is:
Where would you place your stop loss when trading the breakout of the flag chart pattern?
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