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Technical Analysis--FLAG Pattern(0) Comments
Tuesday, March 18, 2014

The FLAG pattern is a very common and profitable chart pattern.  The way it is created is by a sharp rise in prices (which make up the “mast” or “flag pole”) followed by a tight and usually downward sloping price channel that resembles the “flag”.  This pattern is common in all time frames—weekly, daily, intraday—and is equally meaningful in each.  Learning this pattern and how to play it will improve your results greatly. 

 


The really awesome thing about the flag pattern is that it gives you a hint as to where prices will go in the short term.  It predicts with surprising accuracy a price “target” for your trade.  The way you derive your price target is to take the height of the “mast” from the point prices began their rise to the top of the “flag”.  This height measurement in dollars and cents is then added to the point where prices break out of the “flag”.  As an example, if the height of the flag pole is $2.50, then you can anticipate that when prices break up and out of the pattern the stock will move up an additional $2.50 from the point that it broke out.  


I really like to find these patterns in the multiple time frames I trade because they are very reliable and the risk/rewards is easily calculated (since you have such a clearly defined target).  


Does this pattern always work?  


No, NOTHING always works, but they offer a high probability trade.  An important point to remember, though, is if this “breakout” occurs and prices subsequently drop back into the “flag” area, sell immediately as a failed flag breakout usually means the stock will fall significantly and you do not want to wait around for it to come back up.  The best approach if this happens is to take your money off the table and wait to see what happens.  If the stock does end up continuing up, you can always buy it back and use the same price target.  


Important tip:  If the stock SHOULD go up based on your technical analysis, and it doesn’t, then expect it to decisively go the opposite direction.

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