MaryJane
Education

The (psychological) origin of a flag

EUREX:GG2!   Euro Bund
500 5 36
The Theory of flags
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What happens then?

For example the flag gets triggered on the upper side (Break of the resistance):

With every tick above the illustrated resistance, the shorties are getting more and more cold feets because their positions will suffer a loss with every uptick. Traders who are flat up to this time think about going into the market with stop-buy orders, a tick above this level. (Break-out traders) Furthermore the shorties who have to cover their positions turn to buyers and strengthen the asks. The result of it is a strong upmove, a classical shortsqueeze.

Example:
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Capture the FLAG – good luck
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So much to the theory. But what really happens with such a formation above all @ the flag edges?
One must make clear for it to himself how market participants operate and think
I try to illustrate this Market Psychology with the help of an example:
1. After the strong move and the first consolidation, the traded underlying rises once more to the former High, which now can perhaps be seen as a potential resistance.
2. At this level ( yellow “1”), the shorties lie in wait to fix that level because when the price dropped once at this level it could happen over again. Technically, they likely install their stop loss orders a tick above this level. They exspect falling prices, their probably take profit is the former Low
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The traders who tried a longposition at the upper side with the first BIG MOVE are thinking: “Oh, my position went direct into the loss after opening. If the price reaches this entry-level again I will cover my position.
3. When the price dropped to the former low, traders who stood at the sideline could see a chance for buying that point (support) @ yellow “2”. The long-traders will install their stop loss orders a tick under this point with TP @ flags upper edge. Furthermore the shorties will cover their positions and also become buyers.
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Long traders who did buy the first BIG MOVE and didn`t close their position (flat) at the yellow point “1” are thinking: “Oh shit, I had the chance to cover my position without loss. Now the position is again deep in loss..when we reach again the upper level, I will close my position this time.”
4. When the price increases to the former High, more and more shorties see that and will short this level (longs vice versa) ( Longs tend to close their positions there because of the strong resistance)
5. Every time the price reaches this levels more and more traders will join this game. @ the resistance, the supplyside is getting higher and higher meanwhile @ the support the demand is getting higher and higher. @ the support side we now see a support surplus, @ the resistance we see a supply surplus.
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6. This procedure repeats to itself as long as to either the support or the resist breaks.

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In my former educational series (Basics of 1-2-3 Trading - https://www.tradingview.com/chart/EURUSD/Xjknpt4S-Introduction-into-1-2-3-Trading-Pattern/) I have illustrated the important entrypoint “2”, which is a pivot point in the market when you are trading the trend.
Reminder: Entry with 1-2-3-pattern:
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A flag is very similar to this scheme and are a kind of adaption of this 1-2-3-theory.
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