“Flags” are continuation patterns representing a small pause in the market trend. They can be easily spotted as they appear right after a sudden and quick burst from a trading range. In dynamic and quick markets, Flags form as prices pause and move in the same direction as the prior trend after a clear breakout. Flags are known to be very reliable patterns.
“Bull Flag” patterns can be spotted when the market breaks out from a range and makes “lower highs” and “lower lows” in a tight formation. The trend lines connecting these highs and lows are near parallel. Also, tight and well defined “flags” perform better than short and zigzag “flags.”
Trade:
After a series of “lower highs” and “lower lows,” connect prices with two parallel trend lines. Wait for a clear breakout to the upside. Price closing outside the upper trend line is the first sign of a breakout. Enter a “long” trade one tick above the high of the breakout bar. Another clear signal of a “Bull flag” breakout occurs when prices trade above the recent “swing high”.
Target:
Measure the prior distance from the “swing low” at point A to the “flag” formation at point B. Target 70% to 100% of this range from C. Secondary targets in bull markets are 138% to 162% of AB from C.
Stop: Place a “stop” order below the “low” of the “flag.”
Trading A Bull Flag
Trading A Bull Flag
The chart above illustrates a “Bull flag” trade from the Russell Emini futures (ER2) 610 tick chart. After a rally from “A” on January 15, 2007, the ER2 made a “swing high” at “B” and formed a “Bull flag” with a series of “higher highs” and “lower lows”. A late day rally triggered a breakout from the top trend line as prices “closed” above the previous “swing high” at 797. A long trade is entered with a “stop” order at 795 (below level C). Targets are set at 70% to1 00% of the AB range from C and 138% to 162% of the AB range from “C”.