Flags are my favorite technical formations. They have a trend confirmation character, are easy to recognize and grateful when you trade them correct
A bullish flag is a massive, strong volume move followed by several days of sideway trading sessions to lower price action on much weaker volume followed by a second, sharp rally to new highs on accelerating volume again.
The first big Move: First of all, you have to check in which trend phase the market is trading. Flags used as continuation pattern should always and exclusively traded with the trend direction! There should be an evidence of a sharp advance, usually on heavy volume. A gap also can be seen as the “first big move”. This move usually represents the first leg (Flagpole) of a significant advance and the following flag is merely a pause.
Flagpole: The flagpole is the distance from the first move break to the high of the flag.
Flag: A flag is a sideway / light decline-move that slopes against the previous trend. If the previous move was up, then the flag would slope down (and vice versa for a downtrend). Ideal typically this decline/sideway move finds support and stops at the 38,2 fibo-retracement of the first big move.
Duration: Flags are applicable in all timeframes but the longer the timeframe, the better they are applicable. The reliability of patterns that are very shortterm are well debated since years. I made some good experiences in the short-term trading as well as in longterm trading.
Break: For a bullish flag, trading above its flag-upper-edge (resistance) signals that the previous move has resumed.
Volume: Volume should be heavy during the advance that forms the flagpole. Heavy volume provides legitimacy for the sudden and sharp move that creates the flagpole. An expansion of volume on the resistance break lends credence to the validity of the formation and the likelihood of continuation.
Targets: The target of a flag is the length of the flagpole. The technical target is derived by adding the height of the flag pole to the eventual breakout level at point.
Reminder: Entry with 1-2-3-pattern:
A flag is very similar to this scheme and are a kind of adaption of this 1-2-3-theory.
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