What is a flag pattern in trading?
In one line: A flag pattern is a sharp price move (the pole) followed by a short, gently sloping pause against that move (the flag), before the move may continue.
What it looks like
A flag looks like a flag on a pole.
- The pole: a fast, strong move in one direction. Several big candles in a row.
- The flag: a small, tidy pause. Price drifts a little against the pole, between two roughly parallel lines.
- The break: price leaves the flag in the same direction as the pole.
A simple example
A stock jumps from $30 to $36 in two days. That's the pole.
Over the next four days it drifts down gently: $35.80, $35.30, $35.00, $34.70. The highs and lows slope down together, like a small channel. That's the flag. The drift gave back about $1.30 of a $6 move. Shallow.
Then a daily candle body closes at $36.20, above the top of the flag. That's the break.
A bull flag follows an up move. A bear flag is the mirror: a sharp drop, then a small drift up, then a break lower. Both are covered in our bull flag and bear flag guide.
Why it matters
A flag is a Continuation shape. It shows the strong side resting, not giving up. Little selling came in during the drift, so the move may carry on.
It's also a kind of Pullback, which many trend traders prefer to chasing the pole itself.
Where a stop would go
A common choice is just below the flag's low ($34.70 here). If price falls under it, the pause wasn't a pause. Size the trade from that distance with the position size calculator.
A common mistake
Calling a deep drop a flag. If price gives back half or more of the pole, it's not a gentle rest anymore. It may be the start of a turn. Keep flags shallow and short. A flag that drags on for weeks after a two-day pole has lost its shape.
Check the bigger chart first. A bull flag pointing the same way as the higher-timeframe trend is a cleaner idea than one fighting it.
Questions
What is the difference between a flag and a pennant?
Both follow a sharp move. A flag's lines run parallel, like a small channel. A Pennant's lines come together into a small point, like a tiny triangle.
Do flag patterns always break in the direction of the pole?
No. Many fail and break the other way. That's why the stop goes in before the trade, not after.
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