Flags and pennants are continuation patterns. They are traded in the same way, but each has a slightly different shape. The terms flag and pennant are often used interchangeably.
A flag or pennant pattern forms when the price rallies sharply, then moves sideways or slightly to the downside. This sideways movement typically takes the form or a rectangle (flag) or a small triangle ( pennant ), hence their names. Draw trendlines along the highs and lows of the sideways price action. The sharp price rise preceding the flag or pennant is called the flag pole.
The sideways period is often followed by another sharp rise. This is where the trading opportunity comes in. Once the flag pole and a flag or pennant have formed, traders watch for the price to breakout above the upper flag/pennant trendline . When this occurs, enter a long trade.
Target 1: Size of the Flag
The first target of a confirmed Flag pattern can be derived using the measured move technique. The measured move target is a distance equal to the size of the flag. To measure the size of the flag, you would just take the vertical distance between the upper and the lower channel within the flag.
Then you would apply this distance starting from the breakout point. Your first target is located at the end of this distance.
Target 2: Size of the Pole
The next target of the Flag formation equals the size of the Flag Pole. So, to get this target 2, you need to measure the vertical distance between the high and the low of the Pole. Once you get that distance, you will need to apply it to the pattern. Again, as we did with Target 1, you would apply it starting from the breakout point.
Even though flags and pennants are common formations, identification guidelines should not be taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline. Without a sharp move, the reliability of the formation becomes questionable and trading could carry added risk. Look for volume confirmation on the initial move, consolidation, and resumption to augment the robustness of pattern identification.
A flag or pennant pattern forms when the price rallies sharply, then moves sideways or slightly to the downside. This sideways movement typically takes the form or a rectangle (flag) or a small triangle ( pennant ), hence their names. Draw trendlines along the highs and lows of the sideways price action. The sharp price rise preceding the flag or pennant is called the flag pole.
The sideways period is often followed by another sharp rise. This is where the trading opportunity comes in. Once the flag pole and a flag or pennant have formed, traders watch for the price to breakout above the upper flag/pennant trendline . When this occurs, enter a long trade.
Target 1: Size of the Flag
The first target of a confirmed Flag pattern can be derived using the measured move technique. The measured move target is a distance equal to the size of the flag. To measure the size of the flag, you would just take the vertical distance between the upper and the lower channel within the flag.
Then you would apply this distance starting from the breakout point. Your first target is located at the end of this distance.
Target 2: Size of the Pole
The next target of the Flag formation equals the size of the Flag Pole. So, to get this target 2, you need to measure the vertical distance between the high and the low of the Pole. Once you get that distance, you will need to apply it to the pattern. Again, as we did with Target 1, you would apply it starting from the breakout point.
Even though flags and pennants are common formations, identification guidelines should not be taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline. Without a sharp move, the reliability of the formation becomes questionable and trading could carry added risk. Look for volume confirmation on the initial move, consolidation, and resumption to augment the robustness of pattern identification.