Flag is a sloping rectangle shaped pattern used for continuation trading in forex. It is formed with two parallel trendlines forming horizontal tunnel.
About flag pattern in forex
Flags are continuation patterns, found in the major trend. They signalise that the correction within the trend is in progress. Trend following position can be entered once we experience breakout to the direction of trend. Flags are often compared to pennants forex patterns. At times, it may be difficult to distinguish between the two. Flags are formed in the marked after a period of clearly trending market. Tops and bottoms in consolidation area form rectangular shape that we are referring to as flags.
Trading flags forex pattern
Following the breakout to the direction of main trend, another sharp move can be expected. Flags are often part of Elliot waves. Elliot waves number 2 and 4 (correctional waves) are often times taking shape of flag (rectangle).
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Flags are also part of fractal geometry in forex. They simply represent clear structure of price tunnel in smaller timeframes.
We trade flags by waiting for breakout in the direction of general trend. However, fakeouts are also frequent, therefore we should consider volume (volumes forex indicator) and candle formations as the price approaches resistance (Find out more about true breakouts).
Fakeouts can be also traded in flags formations. When trading fakeouts we wait for counter trend fakeout to close within flags range. Subsequently we place order to the direction of the trend, once the fakeout candle close.
Flag sloping downwards is bullish continuation pattern. It marks the correction and its end within major uptrend
Flag sloping upwards is bearish continuation pattern. It s breakout marks the end of a correction within downtrend.
Placing stop loss:We place stop loss at trendline opposing breakout. While trading fakeout we place stop loss just at the tip of the wick of fakeout candle.
Profit target: Range of the flag formation is conservatively used also for profit target.