Flag Chart Pattern

by Amanda Harvey

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What is a Flag Chart Pattern?

A flag chart pattern is a continuation pattern, which means that when this shape appears on the chart of a stock’s prices movement, it acts as a confirmation that the trend which was in progress prior to the emergence of the pattern is likely to continue in the same direction.

The flag pattern is formed when a sharp price movement is then followed by a period of relatively flat trading which zig-zags moderately at the end of the initial sharp movement (the flag-pole). This sideways movement generally forms a rectangular shape by moving between short-term levels of support and resistance. The completion of the pattern occurs when there is a breakout of price movement in the same direction as the sharp move which initiated the flag pattern.

What are the Types of Flag Chart Patterns?

The flag does not always appear level, but will often display a slight angling in the opposite direction of the “flag-pole”.

What this means is that if the sharp movement preceding the commencement of the sideways trading creating the flag pattern was a movement upwards, the zig-zagging which forms the flag may angle downward a little. This type of flag pattern, whether the flag is straight or angled, is called a bullish flag pattern as it indicates further strong upward movement following the completion of the flag.

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A flag pattern that begins with a sharp downward price movement followed by a period of fairly flat trading which may show a slight upward angle is known as a bearish flag pattern. This signals the likelihood of further downward or bearish movement when the price breaks out, completing the flag pattern.

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Why do Flag Chart Patterns Form?

The reason that these patterns form is generally because the market needs time to consolidate following a dramatic price movement. Once this consolidation has occurred, the momentum takes hold once again. For the flag chart pattern to be a valid continuation indicator, it is important that the preceding ‘flag-pole’ price movement was indeed sharp enough to warrant the consolidation period that a genuine flag pattern represents.

Points to Note about Flag Patterns

During the development of the flag pattern, which may be anywhere from five days to five weeks, there will generally be a decreased trading volume. A sharp increase in volume may help to identify the end of the flag pattern and the subsequent price breakout.

Chart by FreeStockCharts.com        Copyright©2015 Stock-Options-Made-Easy.com

The duration of the pattern may be attributed to the degree of price fluctuation during the consolidation phase. Greater fluctuation can result in a longer period of time elapsing while equilibrium is re-established.

The duration of the pattern may also affect the probability that the expected breakout will occur. Some analysts suggest that a flag pattern that continues for over a month may result in a diminishing of likelihood that there will still be sufficient interest in the stock to facilitate a strong breakout.

The length of the flag-pole may also influence the probable development of the trend. If the sharp movement preceding the consolidation experienced during the flag was lengthy, and the flag itself is short, there will unlikely be an opportunity for enough further momentum to build for the expected breakout.

The extent of the breakout (potential price increase or decrease) is generally anticipated to be the equivalent of the flag-pole, meaning that the sharp movement preceding the formation of the flag chart pattern may be reproduced in the breakout which marks the completion of the flag pattern.

In Conclusion

When the necessary attributes discussed in this article are apparent in a flag chart pattern, this pattern may provide a valid continuation indicator. However, as with any type of analysis, it is important to use methods of confirmation before proceeding with a trade based on the formation of a chart pattern.


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