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What is a Flag Pattern?
A is a trend continuation pattern, appropriately named after it’s visual similarity to a flag on a flagpole. A “Flag” is composed of an explosive strong price move that forms the Flagpole, followed by an orderly and diagonally symmetrical pullback, which forms the Flag. When the resistance on the Flag breaks, it triggers the next leg of the trend move and the stock proceeds ahead. What separates the flag from a typical breakout or breakdown is the pole formation representing almost a vertical and parabolic initial price move. Flag patterns can be or .
his pattern starts with a strong almost vertical price spike that takes the short-sellers completely off-guard as they cover in frenzy as more buyers come in off the fence. Eventually, the price peaks and forms an orderly pullback where the highs and lows are literally parallel to each other, forming a tilted Triangle or .
Upper and lower are plotted to reflect the parallel diagonal nature. The breakout forms when the upper resistance breaks again as prices surge back towards the high of the formation and explodes through to trigger another breakout and uptrend move. The sharper the spike on the flagpole, the more powerful the can be.
The is an upside down version of the bull flat. It has the same structure as the but inverted. The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower , which form the flag.
When the lower breaks, it triggers panic sellers as the downtrend resumes another leg down. Just like the , the severity of the drop on the flagpole determines how strong the can be.
The Psychology of a
Flag patterns start off violently as the ‘other’ side gets caught off guard on the trend move or as bulls/bears become overambitious. On bull flags, the bears get blindsided due to complacency as the bulls charge ahead with a strong breakout causing bears to panic or add to their shorts. Once the stock peaks out, the bears regain some confidence as they add to their short positions only to get trapped again when the breakout forms causing more short covering. Since short-sellers from the initial flagpole run up may still be trapped, the second breakout forming through the flag can be even more extreme in terms of the angle and severity of price move. This is when forced liquidations and margin calls kick in. The same happens on bear flags, just inversely.
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Psychology and description of Cup and Handle Pattern:
Psychology and description of the ascending triangle:
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