Just because you can spot the pattern, doesn’t mean you have to jump straight into the market and trade it.
Remember, we need the right context and the right price structure needs to line up for a tradable .
So, the first step is to identify the market trend prior to the flag price formation.
First, a valid needs a sharp decline. This is strong evidence of a and that the is out of balance.
Note* The sharp move is also the Flagpole – the first element of the structure.
Step #2: Identify the flag price formation. The price action needs to move in a narrow range between two parallel lines.
The flag price formation is the second element of the pattern.
Basically, all you need to do is to spot one support and one . It must contain the price action in a very narrow range.
The narrow range is key for the pattern success rate.
Step #3: Sell at the closing candle that generates the .
After we identify the market trend and the characteristics of a good pattern we need to wait for confirmation that the trend is about to resume.
There are two basic approaches to enter the market with the pattern. Aggressive traders will enter at the top of the as this will secure a little bit of bigger profits.
If you’re a conservative trader you can wait for confirmation provided by the .
Our team at TSG prefers to take the conservative approach and wait for a break and close below the before executing the trade.
The chart pattern strategy only looks for trading opportunities when you get a breakout below the flag price structure to be a seller.
The next important thing we need to establish is where to place your protective stop loss.
It is important when looking at this type of strategy to keep everything in the context of the overall market. Too many traders will try to zoom on.
Step #4: Place the protective stop-loss slightly above the Flag.
The chart pattern strategy gives you a simple way to quantify risk because you can place your protective stop-loss slightly above the flag price structure.
We’re accomplishing two things with our tight stop loss:
Higher risk to reward ratio.
With such a tight stop loss you’ll have the comfort of losing many trades in a row because with the amazing RR the can potentially wipe out all your losses in a single trade and still come profitable.
The next logical thing we need to establish for the pattern strategy is where to take profits.
Step #5: Take Profit target equals the same price distance of the Flag pole measured down from the top of the .
The textbook profit target is the height of the flag pole measured down from the top of the flag.
Our team at TSG has learned that the market likes this kind of price symmetries and we like to take advantage of it.
Note*** The above was an example of a SELL trade… Use the same rules – but in reverse – for a BUY trade, but this time we’re going to use the , or .