Trading with Flags And Pennant Patterns
Today we will discuss some more chart patterns that occur periodically. These two patterns actually occur more regularly than I once thought, so I have decided to include them in here. These two patterns are flags and pennants.
The reason why we are discussing flags and pennants together is because they are very similar. the only likely difference is that the trend lines that make up the flag pattern are parallel to each other but those of the pennant converge.
What makes up the flag pattern? The flag looks just like the flag on a mast, with candlesticks that form the mast, and other shorter candlesticks whose highs and lows can be joined together to form the borders of the flag.
There are two types of flag patterns: the bullish and bearish flags.
a) Bullish flag patterns form during an uptrend.
b) Bearish flag patterns, form during a downtrend.
A pennant looks like a flag, but the upper and lower trend lines that form the borders of the pennant converge towards each other. A pennant is also a continuation pattern, with two varieties: the bullish pennant and the bearish pennant.
a) The bullish pennant is seen during an uptrend. When it occurs, the trader should prepare for a continuation of the uptrend.
b) The bearish pennant is seen during a downtrend. Its appearance should alert the trader to a continuation of the downtrend.
Many times, we see flags and pennants occurring one after the other on the charts.
Trading with Flags and Pennants
The first place to start is to monitor the charts. Once you observe a particularly strong trend, then it is likely that a flag or pennant will appear. They appear as areas of retracement after a period of trending prices, and retracements always follow strong trends as traders who got in early take profits.
The moment a retracement occurs, draw trendlines to connect at least two areas of price highs and lows of the candles forming the retracement pattern. Once the trend lines can be seen to either converge or form parallel lines to each other, you have your pennant or flag.
The final piece of the puzzle is knowing when to pull the trigger, which should be at the open of the next candle following these confirmatory signals:
– Bullish flag/pennant: Stochastics at oversold levels (i.e. <25) or appearance of bullish candlestick patterns. These signal the end of the pattern and a possible continuation of the trend.
– Bearish flag/pennant: Stochastics at overbought levels (i.e. <75) or appearance of bearish candlestick patterns. These signal the end of the pattern and a possible continuation of the downtrend.