How To Trade Blog: What Is Flag Pattern? How To Verify And Trade It Efficiently

One of the most common patterns of price trend continuation is the Flag pattern. How to identify this pattern? How to use it in trading most effectively? I will cover it all through this article.

What is the Flag pattern? Characteristics and how to identify

The Flag pattern is a type of price pattern in bullish trends. This pattern consists of a strong increase (called a flagpole), followed by a countertrend with two levels of resistance and support (called flags). The price forms this pattern after a strong increase. It then breaks out of the resistance and continues rising, marking the end of the pattern. This is a very common behavior of prices during an uptrend.

After breaking out of the resistance, the price can retest this new support. If you do not know or want to learn thoroughly about price retest, please review the article: What is Retest?

What is the Flag pattern? How to use it in an uptrend

A practical example in an uptrend.

A practical example of the Bullish Flag chart pattern in an uptrend

In contrast to the pattern in an uptrend, we also have its counterpart in a downtrend with the opposite shape. After a strong decline, prices tend to rebound with a slightly bullish channel. This is followed by a breakout from the support, which marks the end of the Bearish Flag pattern in a downtrend.

An example of the bearish Flag chart pattern in a downtrend.

Characteristics of the Flag pattern

+ The narrower the countertrend of the pattern is, the higher its accuracy will be.

+ The countertrend must be in the opposite direction to the main trend (flagpole). Only then does the pattern make sense. If the countertrend goes in the same direction as the flagpole, the pattern will not work.

How to Trade Forex and binary options with the Flag pattern

Here, I will guide you on how to use the Flag pattern in Forex and binary options trading in the most effective way. Read carefully as this is a very good signal for you to make a profit from the market.

Trade Forex

I will show you how to open orders in the most profitable way when encountering the Flag pattern. Entry point, stop-loss, take-profit, all will be presented in the most detail. Let’s follow through the following specific example.

+ Open UP (BUY) orders when the bullish pattern appears in an uptrend.

How to open an order:

Entry Point: Right after the candlestick breaks out of the resistance.

Stop-Loss: At the bottom of the price channel (the lowest point of the support).

Take-Profit: At the price whose, from the entry point, the length is equal to the length of the flagpole.

+ Open DOWN (SELL) orders when the reverse pattern appears in a downtrend.

How to open an order:

Entry Point: Right after the candlestick breaks out of the support.

Stop-Loss: At the top of the price channel (the highest point of the resistance).

Take-Profit: At the price whose, from the entry point, the length is equal to the length of the flagpole.

Trade binary options

For options trading, the best entry point is when the price retests after breaking out of the countertrend.

Requirements: A long expiration time (If you use the 5-minute Japanese candlestick chart to analyze the market, the expiration time for a binary options order should be between 30 and 45 minutes.)

How to open an order:

+ Open an UP order when the price retests the resistance of the Flag pattern after a breakout in an uptrend.

Trade binary options with the bullish pattern

+ Open a DOWN order when the price retests the support of the reverse Flag pattern after a breakout in a downtrend.

Trade binary options with the bearish pattern

One last word

The Flag pattern is a typical continuation pattern that you need to understand in trading. Experience this pattern on a Demo account thoroughly before using it in trading. In the article, I used images taken from the Olymp Trade trading platform. This is a platform supporting 2 types of trading including Forex and binary options (Fixed Time Trade). You can register an Olymp Trade account right below here.