How to trade using Flag Pattern effortlessly?
How to trade using Flag Pattern effortlessly?
Flag Pattern:
The flag is actually a continuation pattern and can be used to take breakout trades.
Bullish flag formations are found in stocks with strong uptrends. They are called bull flags because the pattern resembles a flag on a pole. The pole is the result of a vertical rise in a stock and the flag results from a period of consolidation.
After a steep rise in the stock price it will take sideways for sometime with small downside in price. This period is called consolidation and it is called Flag. The steep price increase is called a Pole. During the consolidation period stock is getting prepared for next up move.
Reverse is true for inverse flag formation, which can be used in downtrend.
One of the important factor during the flag breakout is a volume. We will see a sharp increase in volume when the breakout happens.
Flag formation:
The flag pattern forms what looks like a small channel either flat or sloping. The channel is formed by two parallel trend lines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trend lines sloping
Time Frame
For positional trades use daily / Weekly / Monthly time frame and for intraday trading, you can use 3 min, 5 min, 15 min time frame. Longer the time frame stronger the breakout. When you use daily time frame ensure the breakout happens when the price closes above the trend line on a daily closing price basis. Same applies for weekly and monthly time frame.
How to calculate Target
The target is set based on the height of the Pole. Once flag or pennant gives price breakout above the trend line then we can expect it to achieve the height of the pole from the Breakout point.
Support levels
The flag top trend line becomes immediate support level after breakout and the bottom trend line is your final support. Keep the respective breakout candle low as immediate support. Weakness is shown once the price closes below the breakout point. But do not exit in panic. You can exit once the price closes below the bottom trend line of the flag.