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Forex 103Lesson 6
Flags and Pennants Patterns
Flags and pennants chart patterns are primarily known for signaling a continuation of the previous trend.
The flag or pennant chart pattern is formed right after a bullish or bearish price movement followed by a period of consolidation.
This is where price tends to take a pause before continuing in the original direction of the trend.
Flags and pennants chart patterns are easy to identify and can be found just after an important news release such as the NFP/unemployment
reports or other important economic news release.
Trading the Flag PatternsThe flag pattern is identified by two main elements.
The flag post, which is basically the strong price action
The flag, which is a period of consolidation
A bullish flag is identified by a downward sloping flag, where as a bearish flag is identified by an upward
sloping flag. The following chart shows the bullish and bearish flag patterns along with how they are
traded.
After price starts to consolidate and move gradually lower, look to
buy on the break out of the flag. The price objective is expected to be
the minimum previous distance of the flag post from the break out price level. The chart below shows an example of a bullish flag
trade example.
The Chart above shows a bullish flag example. We notice how
the price moved rapidly before entering a period of gradual exhaustion, shown by the number of candles within the flag.
After breaking out of the flag pattern, price rallies to reach
not only the minimum price objective but rallies to make higher highs. The stops for the bullish flag are placed just at the low
prior to the break out from the bullish flag.
A bearish flag is characterized by a sharp drop in price followed a period of gradual price congestion moving higher within a channel. On break out of the bearish flag, price then
travels a minimum distance of the flag post. The example below
illustrates a typical bearish flag pattern.
The next chart below, shows an example of how the
bearish flag is traded.
An interesting point to bear in mind in the above bearish flag trade example is the retest of the break out level. This retest may or may not happen, but it does remind
traders that trading on a retest of a break out price
level is always a safe option.
However, this is not always as the case as in most
cases with flags, the break it sharp and quick.
In the case of the above bearish flag break out, despite
the rally back to retest the break out level, price did
manage to reach the minimum price objective.
Trading the Pennant Patterns
The pennant patterns are similar to flags, with the main difference being
that the patterns are formed as converging trend lines into a triangle. The bullish and bearish pennant chart patterns work on the same principles of the flag patterns. The following chart shows a bearish
pennant pattern.
As seen by the above chart, the bearish pennant
pattern is identified by converging trend lines forming a
pennant that is sloping upwards at the bottom end.
The pattern is somewhat similar to a symmetrical
triangle formed within a smaller number of candles, but
preceded by a sharp bearish drop.
The chart below illustrates a bearish pennant example. In this example, we also
get to see a fake out that occurred out of the bearish pennant/symmetrical
triangle.
When taken in view of the larger chart pattern, the bearish pennant, the fake
out could have been easily avoided. Price eventually manages to break lower out
of the pennant pattern eventually retesting the break out before dropping to reach the price objective.
The bullish pennant pattern is the opposite of the bearish pennant pattern and almost similar to a bullish flag pattern, with the exception
that the pennant is formed by converging trend lines forming a symmetrical triangle. The chart below, shows a bullish pennant
example and how it can be traded.
The Chart below represents a trade example of a bullish pennant pattern. Here we can see after a rapid rally, prices started to
consolidate within a tight range forming a pennant. Upon break out
from this pennant, price then subsequently rallied to reach the
projected target.
The flags and pennant patterns can be a good way to trade chart patterns. Because they are continuation
patterns, the chances of them failing a very low and
therefore can offer a safer way to trade chart
patterns, especially for those who are just getting
started with this approach to trading.
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