Flag Pattern - How To Trade It?

KRAKEN:BTCUSD   Bitcoin / U.S. Dollar
Hi Traders. Today's topic is regarding one of the most traded patterns of all time. One thing about trading patterns, is that they are very context-based. Imagine you're taking a head & shoulder setup within a wide range, does it makes sense? The answer is no, most likely you'll stuck in a chugging condition draining your mental capital. Pattern trading is something requires good understanding of the pattern itself, knowing when to not use it, is as equally important as when to use it. In this post, we'll assume the scenario is an uptrend.


Pending order above the flag

- This is the typical textbook entry, where a pending order is placed above the top band of the flag, anticipating a break & flush higher. One big problem with a pending order, if that you'd sometimes get tapped into some low quality setup due to probes or spikes.

Taking the re-test of the bottom band

- This is a rather aggressive way to trade the flag pattern . But it's good way to trade it if you've enough experience and confidence in the continuation of the trend. By entering at the bottom band, you're setting yourself in an advantage due to your wider SL and better Risk-to-Reward.

Where should I place my SL?

- This may seem easy, but believe or not that majority is always having their SL way too tight, usually just a few pips below the flag. Even though majority know its not the right thing to do, but that tend to be the case. SL signals an invalidation of a particular setup, if it is triggered. If you're constantly getting stopped out with your thesis still intact, watching market going into your intended direction is a big slap in your self-confidence. Best way to manage your emotion is to use an ATR-based SL (systematic), or back-test it.

Where should I place my TP?

- This is a tricky one. Some utilize Risk-to Reward based target (Eg. 1:3RR), while some prefer using trailing stops. Personally, having your targets at key technical zones make more sense. There's no right or wrong! It all depends on what suits you the most!

How can I maximize my profit?

- The only way to maximize your profit, is to find out the MAE (Maximum Adverse Excursion) & MFE (Maximum Favourable Excursion) of the strategy. How far did the price run after the TP is met (MFE)? How far did the market goes against you before moving into your favour (MAE)? Eg. If 90% of the valid flag pattern has a MAE of 10 pips, why should you set your SL 25 pips away? Do your due diligence to find out what works best.

What's the current phase of the trend? (1st, 2nd OR 3rd)

- From my experience, I always split a trend into 3 different sections.
1. The first phase is where the momentum is fresh and piping hot, strong impulse with clean price action.
2. The second phase is where price is slowing down with spikes. The logic is simple, for any market to move higher it requires sellers, due to the zero-sum game. What causes a trend is the logic of supply & demand imbalance. This phase is where market is trying to consume more opposite directions' players, to have further continuation in the initial trend.
3. The third phase is where new players and late joiners chasing the market, without knowing the momentum is dying out. Usually it is very choppy with grinding sort of condition. This type of market condition gets people frustrated and its mentally exhausting. Majority are entering and exiting as the market goes nowhere, causing it to chug back and forth .

"Trading is a lonely business, have faith in how far you can go." - Neoh

Let us know in the comment section what's your favourite continuation pattern!

Trade safe as usual.

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