What is a 'Flag'

A flag is a technical charting pattern that looks like a flag on a flagpole and suggests a continuation of the current trend. Flags are areas of tight consolidation after a sharp movement in price and typically consist of between five and 20 price bars. The bottom of the flag should not be lower than the midpoint of the flagpole that preceded it. Likewise, "pennant" formations are usually treated like flag formations because they are very similar in appearance, tend to show up at the same place in an existing trend, and have the same volume and measuring criteria.

Image depicting an example of a flag pattern.

BREAKING DOWN 'Flag'

Flags and pennants are among the most reliable continuation patterns that traders use. The only difference between the two patterns is that a flag resembles a parallelogram (or rectangle) marked by two parallel trend lines that tend to slope against the prevailing trend. The pennant, however, is identified by two converging trendlines and more horizontal which resembles a small symmetrical triangle. The important thing to remember is that they are both characterized by diminishing trade volume, and though different, the measuring implications are the same for both patterns as demonstrated in the above illustration. (To learn more, see: What are the Fundamental Differences between a Pennant Pattern and a Flag Pattern?)

How to Trade a Flag Pattern

  • Entry: Even though flags suggest a continuation of the current trend, it is prudent to wait for the initial breakout to avoid a false signal. Traders could enter a flag on a break above (long position) the upper parallel trend line.                                                                                                                                                                                                                                                                                           
  • Stop Loss: Traders could use the opposite side the flag pattern as a stop loss point. For example, if the lower trend line of the pattern is at $10, a logical place to set a stop-loss order for a long position would be at $9.90, just below the round number.                                                                                                                                                                                                                                               
  • Profit Target: Conservative traders may want to use the difference, measured in price, between the flag pattern’s parallel trend lines to set a profit target. For instance, if there is a $5.00 difference and the breakout entry point is $40, the trader would place a profit target at $45. A more aggressive approach would be to measure the distance in dollar terms between the pattern’s high and the base of the flagpole to set a profit target. For example, if the distance is $25, the profit target would be placed above (long position) the breakout point by that amount. Another option would be to set a profit target for half of the position using the flag’s width and use the distance between the high and low of the flagpole to take profit on the remaining half.
RELATED TERMS
  1. Pattern

    In technical analysis, the distinctive formation created by the ...
  2. Triple Top

    The triple top pattern is a type of chart pattern used in technical ...
  3. Rectangle

    A pattern formed on a chart where the price of a security is ...
  4. Rising Three Methods

    The Rising Three Methods is a bullish candlestick pattern that ...
  5. Gartley Pattern

    The Gartley pattern is a complex chart pattern, based on Fibonacci ...
  6. Sanku (Three Gaps) Pattern

    The Japanese word for a candlestick pattern that consists of ...
Related Articles
  1. Trading

    Continuation Patterns: Rectangles and Pennants

    Flags and pennants indicate direction of activity of the prevailing trend. Learn how.
  2. Trading

    Bullish Flag Formation Signaling A Move Higher

    Find out which stocks are trading within a bullish charting formation
  3. Trading

    Introduction to Technical Analysis Price Patterns

    How to recognize price patterns that are key to technical analysis.
  4. Trading

    Profiting From Carry Trade Candidates

    Capitalize on the yield of the interest rate differential by using flags and pennants.
  5. Trading

    JPMorgan and Citigroup Stocks Could Hit New Highs

    Bull flags are forming for JPMorgan and Citigroup stock.
  6. Trading

    Forex Consolidation Trading - Trade The Calm, Profit From The Storm

    Capture quick profits with the powerful directional biases of these two patterns.
  7. Trading

    Technical Analysis: Triple Tops and Bottoms

    Triple and double tops and bottoms may be tough to spot but can be powerful patterns.
  8. Trading

    Watch For These Chart Pattern Breakouts Right Now

    These stocks are near chart pattern breakout points, indicating potential trend reversals ahead.
  9. Trading

    Breakout Stocks to Watch Right Now

    These three stocks are near major breakout points, which will affect the short-term, and potentially the long-term direction of the stocks.
RELATED FAQS
  1. What are the main differences between a Symmetrical Triangle pattern and a pennant?

    Understand the key differences between the symmetrical triangle and pennant patterns, including how they differ in formation, ... Read Answer >>
  2. What are the differences between patterns and trends?

    Learn the difference between a pattern and a trend. Explore how technical analysts use patterns and trends to identify trading ... Read Answer >>
  3. How do I identify a stock that is under consolidation?

    Discover the three major characteristics stocks or securities exhibit when they are trading under a period of price consolidation. Read Answer >>
  4. How can I determine a stock's next resistance level or target price?

    Determining where the price of an asset will stop once it has hit a new high is one of the most difficult tasks for any trader. Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center