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The Flag pattern is a stock market pattern analyzed by technical analysts, those who study technical analysis. It can be related to a corrective pattern in the topic of Elliott Waves because it moves in the opposite direction of the trend.

The Flag pattern is called a “Flag” because when created, it resembles a flag. The parts include the pole and the flag.

Quick Notes – Flag Pattern:

  1. The Flag pattern has two main parts: The pole and the flag.
  2. The Flag pattern moves in the opposite direction of the trend.
  3. Buyers and sellers switch control in the flag part, and with consolidation, a breakout may eventually occur.

How to Identify the Flag Pattern

The Flag pattern has two main parts, the pole, and the flag. There is also a breakout after the flag. When studying a Flag pattern, technical analysts often use a candlestick chart.

Flag Pattern with Labeled Parts

So, the pole would start to form which can look like a trendline, and then the flag would start to form and move in a counter direction to the trend. The flag part can look like a Rectangle pattern and is often an area of consolidation.

Price in the Flag part would eventually break out past a line of support or resistance. In this case, the price performs a bullish breakout, continuing the original trend.

Example of the Flag Pattern with a Candlestick Chart

In this example, we see a possible Flag pattern. The pattern begins with an uptrend, which can be labeled as the pole. Then, the stock moves in a corrective fashion to the trend. This is the flag. Notice that the flag part slowly consolidates.

The Flag pattern then breaks out, continuing the original trend.

According to Investopedia, in a flag pattern, the bottom part should not exceed the midpoint of the pole that preceded it. 

A Flag pattern does not always occur on a bullish trend, as there are two types of Flag patterns.

Bull Flag

The Bull Flag pattern is exactly what we were just looking at, with the pole as the uptrend, the flag part moving in a counter, or bearish direction of the trend, and then the breakout.

Flag Pattern with support and resistasnce lines drawn out

In this chart, we see the uptrend as the pole, then the corrective portion being the flag which is slightly consolidating, then the breakout to continue the original trend direction.

Bear Flag

The Bear Flag pattern is basically the opposite of the Bull Flag pattern. This pattern is bearish because it is generally a continuation of a downtrend.

So, the pole would be the downtrend and the flag would be a corrective portion of the trend which is bullish.

The breakout may be a bearish continuation of the original trend.

How to Trade the Flag Pattern

The Flag pattern is a relatively simple pattern to understand, but there are a lot of moving parts to it that make it perform.

In this pattern, buyers and sellers switch control.

Bull Flag

For a bullish Flag, traders can recognize that the chart moved into the flag part of the pattern, and sell their position or short.

Traders can also buy at the bottom support line and sell at the top resistance line, and short from the top resistance line to cover at the support line.

They can also buy the potential breakout and try to profit.

A flag that is bullish starts out with buyers in control of the uptrend, then sellers taking control of the flag. Control switches back and forth which often creates consolidation.

Then, because the flag is bullish, buyers take control and force the stock past a significant resistance line.

Buyers and sellers controlling the Flag Pattern

Bear Flag

Traders playing a bearish Flag pattern can try and predict the corrective flag pattern, and buy into it to ride the corrective wave.

Traders can also buy at the bottom support line and sell at the top resistance line, and short from the top resistance line to cover at the support line.

They can also short the potential breakout.

A flag that is bearish starts out with sellers in control on the downtrend, then buyers taking control of the flag. Control switches back and forth which often creates consolidation.

Then, because the flag is bearish, sellers take control and force the stock past a significant resistance line.

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