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There are many price action patterns that traders use to catch moves, but none of them catch my eye quite like bullish and bearish flags.
The characteristics are easy to identify, making it a great option for beginners. But don’t be fooled, these continuation patterns are as profitable as they are simple.
So what exactly is a bullish or bearish flag pattern?
The first thing to know about this chart pattern is that it represents consolidation. This means that it occurs after a large movement in price. As such it’s also a continuation pattern, which means that the market is likely to continue in the same direction once the pattern comes to an end.
But before we go too far, let’s look at the components of a bullish or bearish flag pattern.
The illustration above shows a bullish flag pattern. However, its bearish alternative has the same components. The difference is that a bearish flag is the exact inverse of the illustration above.
Let me explain each component in greater detail.
The Flag Pole
This is the initial move in price. It can be represented by either an uptrend or a downtrend. The angle of this move is irrelevant in terms of the validity of the flag pattern.
The distance of the move should be measured by calculating the previous swing high or low to the current swing high or low. As an example, we would measure from the bottom of the red line to the top of the red line in the illustration above.
The flag formation is the key to this pattern. This is the point at which, after a strong move in price, the market consolidates for a period of time. The length of time is irrelevant, however do note that longer consolidation periods tend to lead to more aggressive breakouts.
At this point the market has finished consolidating and is now trending in the original direction. Using the distance we calculated above for the flag pole, we now have a measured objective for a possible target.
If this is a little unclear right now, don’t worry, it will all make sense once you see the illustrations below.
Now that we have a good understanding of the different components, let’s take a look at a few real-life examples.
GBPUSD Bullish Flag
Notice in this example how the continuation is the exact same length as the flag pole. The distance for the flag pole is measured from the swing low to the swing high of the flag pattern.
Similarly, we measure from the swing low of the flag pattern to the swing high of the continuation. In the example below, both represented an equal distance of 500 pips.
AUDCHF Bullish Flag
A bit different from the GBPUSD flag above, this bullish flag on AUDCHF extended almost an equal distance to that of the flag pole itself.
Furthermore, the flag pole was approximately 260 pips while the continuation only resulted in a 230 pip rally. So while the two were very close in terms of distance traveled, there was a slight difference.
EURCAD Bearish Flag
Last but not least we have a bearish flag pattern on EURCAD. Just like the bullish flags above, this bearish flag has a flag pole and continuation that are both equal distances of 580 pips.
The flag pattern isn’t as well-defined as the other examples, but it still gives us a nice channel with an accurate measured objective.
I hope this lesson has provided you with a blueprint of what to look for when identifying bullish and bearish flag patterns.
We’ll get into how to trade these price action patterns in a later lesson. For now, just focus on being able to identify these patterns – they occur all the time and can be a powerful asset in your trading toolbox.
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