A short pause after a strong impulse, after which the trend often continues. Here is how to tell a flag from a reversal, where to enter and how to measure the target using the "pole".
A small channel against the impulse: parallel lines sloping down in a bull flag.
Pennant
The same, but the boundaries converge into a small triangle.
Target
The length of the pole, projected from the breakout point.
What the pattern looks like
A flag is a pause after a sharp move. Price shoots up (the pole), then for several candles drifts back in a narrow sloped channel (the flag). Traders take some profit, but there are few sellers and the pullback is sluggish. A break of the channel's upper boundary continues the trend.
The pole, a flag sloping against the trend and a breakout up. The dashed line is the target based on the pole's length. Illustrative data.
The pennant
A pennant is a close relative of the flag. After the pole price also consolidates, but in a small converging triangle rather than a channel. It's traded the same way: enter on the breakout in the direction of the pole.
The pole, a converging triangle and a breakout up. The dashed line is the target based on the pole's length. Illustrative data.
The bear flag
The mirror pattern in a downtrend: a sharp drop (the pole), then a sluggish pullback up in a narrow channel and a break of the lower boundary. Enter after a close below the channel, stop above the flag's high, target the pole's length downward.
A pole down, a channel sloping against the decline and a breakdown. Illustrative data.
How to trade it
01
Find a strong pole
The impulse should stand out clearly on the chart. No pole, no flag.
02
The pullback should be shallow
Usually up to 50% of the pole. Deeper than that it's a correction, not a flag.
03
Enter on the boundary break
A close above the upper boundary of a bull flag, ideally on rising volume.
04
Stop below the flag's low
If price goes lower, the impulse has run out.
05
Target the pole's length
Projected from the breakout point.
Not every flag works. Even a perfect pattern with every condition met sometimes fails — that's what the stop is for. Don't size up because the pattern "will definitely work".
Common mistakes
Calling any pullback a flag
A flag is a short, narrow, sluggish pause after a sharp impulse.
Entering inside the flag
Until the breakout the direction isn't set: the channel can collapse downward.
Ignoring volume
A strong flag breakout usually comes with rising volume. A breakout without volume is more often false.
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