Flag patternis a technical analysis tool that predicts the continuation of the current market trend (trend). It consists of two parts: the “flagpole” and the flag (the channel in which the price moves).
If we consider the pattern Flag in terms of waves, then “flagpole” is an impulse, and the flag itself is a correction. When the correction is over, a new impulse is implemented, restarting the previous trend.
Classic trading strategy
According to the classic, after the final formation of the Flag pattern and the subsequent break-down of its channel border, the price should pass a distance equal to the value of the flagpole.
Market entry – performed at the point (1), when the price breaks the channel border;
Trade purpose – equal to the flagpole height (H);
Stop order – set at the level of correction top, point (2).
The appearance of the forex flag pattern on the chart is necessarily preceded by an impulse (1), but when you see only one impulse, you cannot talk about a possible “Flag”. The model formation itself starts when the price stops after the impulse and starts to enter the correction stage – point (2).
The reason for the stop can be active closing of profitable positions opened before the impulse, as well as the desire of big players to increase the weight of their positions due to the crowd stops at the points (3,4).
When positions are gained or price has made a sufficient correction (about 1/3 of the flagpole), an impulse (5) is initiated to continue the trend.
Forex Strategy Flag chart pattern + ABC
The channel forming the Flagchart pattern is often a pattern of “ABC”. This strategy involves using the ABC pattern for more accurate entry and exit. A successful market entry can be considered an entry made at the level when the price has already updated the local extremum (A) but has not yet crossed the boundaries of the channel – “sweat zone” on the right chart.
Market entry (1) – performed at any point of the “sweep zone”;
Deal purpose (TP) – set to update point (X) or the nearest round digits levels behind point (X);
Stop order (SL) – we put out the range of the channel, but not further than the beginning of the “flagpole”.
Market entry – in the absence of a clear “ABC” model and the presence of a signal to buy / sell can enter the market at points close to the border of the channel (sweep zone) in the direction of trend continuation;
The purpose of the deal and Stop orders are the same as in the previous version.
We advise you not to enter the market according to the classics, as they are unprofitable due to their late entry. It is a good sign that the figure will work successfully, there are point volumes at the moment of breaking the channel border, i.e. at the classical entry point.