Flag Pattern
The Flags are short term continuation patterns that mark a small consolidation before the resumption of the previous move. Flags are among the most reliable of continuation patterns. They are formed when there is a sharp price movement followed by a generally sideways price movement. The pattern is then completed upon another sharp price movement in the same direction as the move that started the trend.
Flags are usually preceded by a sharp advance or decline with heavy volume and generally last from one to five days, and sometimes from one to two weeks. They usually represent only brief pauses and typically seen right after a big, quick move. The price then usually takes off again in the original direction.
Volume generally contracts during the flag formation and increases on the breakout.
Flags can be classified as follows:-
- Bullish Flags
- Bearish Flags
Bullish Flags
Bullish Flags are identified by lower tops and lower bottoms, with the pattern slanting against the trend. Bullish flags are formed when a stock in an up trend consolidates after making an up move. The trend lines of the formation run parallel to each other and the pattern looks exactly like a rectangular flag hoisted on a mast. Anyone can make good money by buying a stock when it breaks out from the bullish flag formation with a rise in volume.
Bearish Flags
Higher tops and higher bottoms identify Bearish Flags. Like bullish flags, bearish flags also have sloping lines against the trend and their trend lines also run parallel to each other.