An ascending flag can be defined as a continuation pattern. It is a price chart that is characterized by a sharp countertrend (also the flag) succeeding a short-lived trend (the flag pole). It is formed by two straight upward parallel lines shaped like a rectangle. The flag is usually adjusted in the direction of whichever trend it consolidates. This pattern is short-term and indicates the fact that the seller will need a break, contrary to the bullish channel.
Understanding Flag Patterns
A flag pattern is used to identify the possibility of continuation of a previous trend from the point which price may have drifted against the same trend. If the trend resumes, the price increase could be fast, creating more advantages during a trade by noticing the flag pattern.
In its formation, an ascending flag occurs in a downtrend. Quite often, a break will occur when the movement is halfway gone. Flag patterns can either be upward trending (bullish flag) or downward trending (bearish flag). Bullish and bearish flag patterns are almost similar in structure but still differ by trend direction and other subtle differences in volume pattern. The bullish volume pattern tends to increase in the preceding trend while it declines in the consolidation. The bearish volume pattern increases first before it holds level since bearish trends are more likely to increase in volume as time passes. Typically, the flag pattern consists of about five to twenty price bars.
The flag pattern mainly consists of five characteristics, namely:
The preceding trend
The consolidation channel
The volume pattern
A confirmation where price moves in the same direction as the breakout
Trading a Flag Pattern
A trader can use the dynamics of flag patterns to trade, by creating a working strategy for trading the patterns by identifying the three key points: entry, stop loss, and profit target.
Entry: At this point, traders are expected to wait a little for an initial breakout to avoid false signal even though flags always suggest the continuation of a current trend. It is usually expected of traders to enter a flag a day after the price has broken and closed above the upper parallel line, in a bullish pattern. Or when the price has closed below the lower parallel line, in a bearish pattern.
Stop Loss: Most traders use the opposite side of the flag pattern as a stop-loss point. For example, if the upper trend parallel line of the pattern is at $50 per share, and the lower parallel line is $46 per share, for some traders, the price level below $46 will be an appropriate place to set up a stop-loss order.
Profit Target: Conservative traders set up a profit target by using the difference, measured in price, between the flag’s pattern’s parallel trend lines.