Below is one example of how you might choose to manage a Bullish Flag trade. Price action was contained within two parallel trend lines that sloped down. 

Here is a picture of the completed pattern. As you see, the price reverses afterward, which would have created unpleasant conditions for the long trade.

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Bullish flag formations are found in stocks with strong uptrends. They are called bull flags because the pattern resembles a flag on a pole. The pole is .

Upper and lower trendlines are plotted to reflect the parallel diagonal nature. The breakout forms when the upper resistance trend line breaks again as prices surge back towards the high of the formation and explodes through to trigger another breakout and uptrend move.

The sharper the spike on the flagpole, the more powerful the bull flag can be. Bearish Flag The bear flag is an upside down version of the bull flat. It has the same structure as the bull flag but inverted. The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower trendlines, which form the flag.

When the lower trendline breaks, it triggers panic sellers as the downtrend resumes another leg down. Just like the bull flag, the severity of the drop on the flagpole determines how strong the bear flag can be. On bull flags, the bears get blindsided due to complacency as the bulls charge ahead with a strong breakout causing bears to panic or add to their shorts. Once the stock peaks out, the bears regain some confidence as they add to their short positions only to get trapped again when the breakout forms causing more short covering.

Since short-sellers from the initial flagpole run up may still be trapped, the second breakout forming through the flag can be even more extreme in terms of the angle and severity of price move.

There are also bearish patterns, where the price drops sharply then forms the flag or pennant. If a long trade is initiated on an upside breakout, place a stop loss below the low of the flag or pennant not the flag pole. Price Target The concept behind the flag and pennant patterns is that the momentum seen during the flag pole phase could continue once the pattern completes.

Trading Considerations Flags and pennants occur in both uptrends and downtrends. Focus on trading upside breakouts from bullish patterns during uptrends.

While a downside breakout may indicate the price could move lower for a time, going short during an uptrend is a less reliable trade. The flag pattern is one that tends to catch my interest when I find it because they can provide explosive moves. Today, we will look at how to identify higher probability trading opportunities off the bull flag pattern. The flag pattern is fairly simple with just three components.

The flag pole The flag A strong up trend First identify an instrument in a strong up trend flag pole. Through the duration of this uptrend, eventually prices need to rest and consolidate those gains. The flag portion of the pattern tends to be a gently downward sloping price channel. Additionally, this consolidation will retrace a small portion of the previous up trend.

Since this is a continuation pattern, we look for prices to break higher with a length equal to the size of the flag pole.

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What is a Flag Pattern? 

The flag and pennant patterns are two continuation patterns that are similar, differing only in their shape during the pattern's consolidation period.

Bullish flag formations are found in stocks with strong uptrends. They are called bull flags because the pattern resembles a flag on a pole. The pole is . The target is approximately as long as the pole of that flag. Always protect the trade by placing a sell on stop order below the low of the pattern. Whereas in a down trend flag patterns are bearish continuation patterns. 

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A flag pattern is a trend continuation pattern, appropriately named after it’s visual similarity to a flag on a flagpole. A “flag” is composed of an explosive strong price move that forms the flagpole, followed by an orderly and diagonally symmetrical pullback, which forms the flag. The bull flag pattern is found within an uptrend in a stock. This pattern is named for the resemblance of a flag on a pole. The bull flag is a continuation pattern which only slightly retraces the advance preceding it.

The main difference between the two patterns is the shape of the correction which comes after the Pole. The Flag pattern creates a channel correction, while the Pennant creates a triangle correction. In both cases, though, the potential of the patterns is the same. Since this is a continuation pattern, we look for prices to break higher with a length equal to the size of the flag pole. For the past 3 months, traders have been buying risk .

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