HOW TO TRADE FLAGCHART PATTERN

in-depth tutorial

BULLISH FLAG EXPLAINED

BULLISH FLAG ILLUSTRATION

Bullish "Flag" chart pattern illustration
Direction: Continuation
Type: Bullish
Occurrence: High
Common term: Short - Medium

BULLISH FLAG PRICE ACTION STRUCTURE

  • A steep upwards price action initiates from 1 till finding first resistance 2, creating the flag's pole.
  • Price action reverses direction from 2 and forms lower highs and lower lows in a narrow flag formation till it finds the lowest support in the formation at point 3.
  • The pattern is completed when price action reverse direction from the last touch to the lower flag border and goes upwards till it breaks the upper border at point 4.

NOTES ON BULLISH FLAG

  • Before the breakout, at least two highs (including the flag's pole high) and two lows are needed for a valid pattern.
  • The flag's pole is usually a strong and sharp upwards price action.
  • Volume is usually high at the flag's pole, as well as when breaking the flag's upper border.
  • This pattern is commonly found on short and medium-term time-frames.

HOW TO TRADE BULLISH FLAG

  • Trade entry: the pattern is traded after price action breaks the flag's upper border at point 4.
  • Take profit: identified by measuring the flag's pole, which is the vertical distance between points (1 - 2), that measurement is then applied from the breakout point 4.
  • Stop loss: the flag's lowest low 3.

BULLISH FLAG REWARD:RISK

  • This pattern is known for its high R:R.
  • R:R depends on how narrow the flag formation is, compared to the flag's pole height (1 - 2).
  • Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond that level to give the trade setup some room to breathe, and of-course calculations for position size and R:R should be done with respect to that rate.

BULLISH FLAG REAL EXAMPLE

Real example for a bullish "Flag" chart pattern, using the H4 chart of USD/CAD on XM's MT4 platform
Currency pair: USD/CAD
Timeframe: H4
Breakout: 14-Jul-2015
Platform: MT4
Broker: XM

BULLISH FLAG FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the upper border at point 4
  • Take profit: 517.2 pips - usual measurement applied from point 3
  • Stop loss: 180.5 pips (R:R 2.865) - set at 7% of target measurement, beyond absolute SL

NOTES ON THIS TRADE SETUP

  • Price action instantly and briefly tested the flag's upper border before heading to target.
  • The candle right after the breaking candle closed extremely near to the flag's lower border and had a wick inside the pattern, thus the candle after that one was used to confirm the breakout.

BEARISH FLAG EXPLAINED

BEARISH FLAG ILLUSTRATION

Bearish "Flag" chart pattern illustration
Direction: Continuation
Type: Bearish
Occurrence: High
Common term: Short - Medium

BEARISH FLAG PRICE ACTION STRUCTURE

  • A steep downwards price action initiates from 1 till finding first resistance 2, creating the flag's pole.
  • Price action reverses direction from 2 and forms higher lows and higher highs in a narrow flag formation till it finds the highest support in the formation at point 3.
  • The pattern is completed when price action reverse direction from the last touch to the upper flag border and goes downwards till it breaks the lower border at point 4.

BEARISH FLAG REAL EXAMPLE

Real example for a bearish "Flag" chart pattern, using the daily chart of EUR/USD on XM's MT4 platform
Currency pair: EUR/USD
Timeframe: D1
Breakout: 11-Oct-2014
Platform: MT4
Broker: XM

BEARISH FLAG FOREX TRADE SETUP

  • Trade entry: at the closing rate of the candle after breaking the lower border at point 4
  • Take profit: 959.1 pips - usual measurement applied from point 3
  • Stop loss: 324.8 pips (R:R 2.953) - set at 7% of target measurement, beyond absolute SL