[DavidWaring]

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Practice Trading Flag and Pennant Patterns with a Free FXCM Forex Demo

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In our last lesson we looked at strategies for trading the rising wedge pattern and falling wedge pattern in the stock, futures, and forex market. In this lesson we are going to start our series on continuation patterns with two chart patterns known as Flags and Pennants.

Typically seen after a big move in one direction in a particular financial instrument, flags and pennants represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred. The flag and pennant patterns both contain a “flagpole” which is represented by the sharp move upwards or downwards, and then the flag portion of the pattern which forms when there is a consolidation which can be encompassed with a rectangle, or a pennant portion of the pattern which forms when there is a consolidation which can be encompassed by a symmetrical triangle.

When a flag or pennant occurs in an uptrend, a break of the top resistance line can be seen as a resumption of the uptrend. Conversely when a flag or pennant occurs in a downtrend a break of the bottom support line can be seen as a resumption of the downtrend.

Flag Patterns:

As you can see in the below example the flag portion of the bull flag pattern is encompassed by two parallel lines. These lines can be either flat or pointed downward representing the consolidation in the market. The pole is then formed by a line which represents the move big move upward which sets up the bull Flag. The pattern is seen as the market potentially just taking a “breather” after a big move before continuing its move upward and is thus referred to as a bullish pattern.

Example of a Bull Flag:

The bear flag occurs in down trends and is exactly the same pattern as the bull flag, simply flipped upside down. The lines which form the flag can be either flat or pointed upward, and the pole of the pattern is then formed by a line encompassing the move downward which sets up the bear flag consolidation. The pattern is seen as the market potentially just taking a “breather” after a big move downward before continuing its move downward and is therefore referred to as a bearish pattern.

Example of a Bear Flag:

Pennant Patterns:

Similar to a flag, a pennant pattern forms when the consolidation in the market narrows as it matures requiring a more triangular shape to encompass the move instead of a square shape which forms the flag pattern.

Example of a Bull Pennant:

Just as with the Bull Flag the pennant portion of the pattern can be either pointed straight ahead or downward and the pole is formed by the move upward which sets up the pennant shaped consolidation.

Example of a Bear Pennant:

Just as with the Bear Flag the pennant portion of the pattern can be either pointed straight ahead or upward, and the pole Is formed by the move downward which sets up the pennant shaped consolidation.


That’s our lesson for today. You should now have a good understanding of flags and pennants and the difference between the bull and bear versions of each. In our next lesson we are going to look at specific strategies for trading the flag and pennant patterns, complete with entry and exit points so we hope to see you in that lesson.

As always if you have any questions or comments please leave them in the comments section below so we can all learn to trade together, and good luck with your trading!

[KyoOishi]

Can I call this a flag? Just found it a few minutes ago..

[David Waring]

Originally Posted by KyoOishi

Can I call this a flag? Just found it a few minutes ago..

Hi KyoOishi,

Welcome to the community.

The image is a little small so let me know what instrument you are looking at there and I will be glad to have a look on my charts and give my thoughts.

Best Regards,
Dave

[kawola17]

Hello David,

My first thoughts are that, couldn't the flag easily be confused with the wedge? I mean the flag looks so much like the wedge.

I don't know if it's just me, but some of these patterns are very hard to identify. I can easily see the head and shoulders, but some of the other ones are a little tougher. I guess it just takes time and the longer you look at the charts, the easier they'll be able to notice. (Especially if you've been looking at charts for years).

Thanks in advance.

Sincerely,
Bill

[David Waring]

Originally Posted by kawola17

Hello David,

My first thoughts are that, couldn't the flag easily be confused with the wedge? I mean the flag looks so much like the wedge.

I don't know if it's just me, but some of these patterns are very hard to identify. I can easily see the head and shoulders, but some of the other ones are a little tougher. I guess it just takes time and the longer you look at the charts, the easier they'll be able to notice. (Especially if you've been looking at charts for years).

Thanks in advance.

Sincerely,
Bill

Hey Bill,

Yes the patterns can be a little confusing at first but they get easier to see with time. The main difference between a flag and a wedge is that the flag is preceded by a large quick runup in the market (the flagpole potion of the pattern). The flag then represents the consolidation period after the runup.

For a wedge the quick move in the market is not required.

Hope that helps.

Best Regards,
Dave

[dunda2001]

Hi Dave,

Was just trying to think of the psychology and reasoning for this sort of pattern occuring. It seems to me that perhaps this might be a case of of the 'flagpole' occuring due to some sort of fundamental news shock to the financial instrument. Perhaps earnings report where speculators buy/sell depending on the news, only to have traders pound the price back to normal knowing the fundamentals of the underlying asset to be unchanged. Am I correct in thinking this or can there be other reasons or am I just spouting nonsense? The reason is, perhaps another thing that traders could use as confirmation would be fundamental analysis for patterns such as these.

[David Waring]

Hey Dunda2001,

Good question as I think it is always important from a trading standpoint to understand why something is considered a tradeable pattern instead of just trading it because others have said so.

The first thing that I think it is important to understand here is that flag and pennant patterns are normally thought of as continuation patterns meaning that the market is expected to break out in the direction of the move the forms the flagpole portion of the pattern.

From my experience many times the initial large move that forms the flagpole portion of the pattern is driven either by some fundamental news event (like earnings which you have pointed out or an economic release) that surprises the market.

The portion that forms the flag or pennant portion of the pattern however, is from my experience normally based more on technicals than fundamentals, as this represents a consolation period in the market where traders "catch their breath" so to speak, before continuing to push the market in the direction of the original move.

Let me know if that does not make sense or if there are any other questions or comments on this one.

Best Regards,
Dave

[dunda2001]

Thanks Dave that's really helpful. When you say the traders are catching their breath, by that do you mean that the market is basically testing out the support and resistances during a time of consolidation?

[David Waring]

my pleasure. It is possible that the market is testing out support and resistance levels but in general remember that the market ultimately trades on supply and demand. So, for instance, if we get a piece of fundamental news like earnings that surprise to the upside, then everyone jumps in and buys, creating additional demand. This forces prices up, forming the flagpole portion of the pattern. Once this initial demand is exhausted however, the market needs some time to soak in what has just happened and build additional demand which generally comes in the form of traders who missed the original move but still feel like there is a good opportunity to own the stock in the direction of the move.

So this is what I mean by catching its breath and this is also what is referred to as consolidation. From watching this type of price action traders determined that after a big move in one direction and consolidation period, more times than not you will get a break in the direction of the original move. So this is basically the rationale behind the pattern.

Let me know if that does not make sense or if there are any other questions/comments on this one.

Best Regards,
Dave

[Rich]

David,

I noticed that the trend for the year for both the Bull and Bear flags were the same as what the flags indicated. In other words, have you seen a trend for a year that was bearish and the flag turned Bullish (and vice versa)?

It seems that on a long bull/bear trend the flags just support the continuance of the existing patterns, or can this be broken and if so how often?
Thanks,
Rich