A Flag Pattern is a continuation chart pattern, named due to its similarity to a flag on a flagpole.
Although it is less popular than triangles and wedges, traders consider flags to be extremely reliable chart patterns.
A flag is a relatively rapid chart formation that appears as a small channel after a steep trend, which develops in the opposite direction.
The preceding trend is crucial for pattern formation.
A “flag” is composed of an explosive strong price move forming a nearly vertical line.
This is known as the ”flagpole”.
After the flagpole forms, bearish (bullish) traders, eager to capitalize on instant profits, begin selling (buying) off their holdings.
The resulting descending (ascending) trend channel resembles a downward-sloping (upward-sloping) parallelogram, giving the chart the appearance of a flag, and hence its name.
What separates the flag from a typical breakout or breakdown is the pole formation representing almost a vertical and parabolic initial price move.
Flag patterns can be bullish or bearish:
Breakouts happen in both directions but almost all flags are continuation patterns.
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