The flag pattern is a continuation formation that can appear during a brief pause in either a bullish or bearish trend. The chart example above shows a bullish flag pattern that formed in the USD/CAD currency pair.
These patterns consist of two parallel lines that act as support and resistance during a consolidation phase which resembles the flag with the preceding upward move resembling the flagpole part.
The second chart example shows the bearish version of a flag pattern in the AUD/NZD and is simply the inverse of a bullish flag.
Using our previous bullish flag pattern, aggressive traders will often execute a long position at the lower support line and place their target above their entry, equal to the height of the flagpole.
Conservative traders, on the other hand, will tend to wait for a breakout of the upper resistance line first before they will enter and also target a level equal to the height of the flagpole.
Traders Tip: A flag pattern will generally display certain characteristics during its formation which can help a trader qualify whether this pattern will present a good trading opportunity or not.
My final chart shows the same bearish AUD/NZD flag pattern that was presented before and displays the same characteristics from a volume and retracement perspective. In this example, both the aggressive and conservative entry methods would have reached their targets.
Note: Bearish flag patterns will not always show a decline in volume during the flag formation since bearish markets generally move faster due to the underlying fear and anxiety that drive a sell-off. This behavior can in some instances lead to a less pronounced increase in volume during the breakout phase.
The flag pattern is a powerful trend continuation chart pattern that appears in all markets and timeframes. Once these patterns come to an end, the resulting move can often be strong and reach your target quickly, which is why the flag pattern is so popular amongst technical traders.