Flag and Pennant Continuation

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Flag and Pennant chart patterns are generally seen after a big move in trend and represent brief consolidations in the market before there’s resumption in this trend - Thus they are said to be continuation patterns. Both the flag and pennant contain a flagpole, which is a brief spurt in price trend, then a ranging period bound by support & resistance.

The two patterns look like each other as we'll see later, but in essence the flag is rectangular, while the pennant is triangular.  Both act in the same way - after the period of consolidation there is break-out in the same direction as the prior trend.  The reason they form is that after a large price move up the market needs to pause and survey the market, before continuing the trend.

The pattern is basically made up of a fundamentals shock to the system then a technical consolidation. I.e. Unexpected fundamentals news (higher/ lower than expected earning etc…) leads to the pole, then there’s a period of consolidation before the trend continues. In an upside trend there will have been an increase in demand pushing prices up. Once this demand is exhausted and after the consolidation, traders jump back in to continue the trend.

The Flag Continuation

Bull Flag Continuation
The Flag Continuation Pattern is represented by a rectangle pattern formed by two parallel lines either pointing horizontally right, or two parallel lines pointing in a downward direction within a larger up-trend.  We can see this sloped flag represented in the below chart called "Bull Flag Continuation".  These parallel lines are support and resistance levels of the price and in general you'll find it hard to find a horizontal flag, as the pattern is generally sloped. (More can be read on Support and Resistance here).   A flag seen in an up trend is called a bull flag Continuation.

Bull Flag Continuation Example

When there is a beak in the resistance line (top line) in an up-trend it is often seen that the stock, commodity, f.x pairing, etc.. is about to resume it’s upward trend – A continuation.  This is seen in the above Bull Flag Chart where resistance is broken at 73 and the prior trend continues.   The buy signal is formed once the price breaks through the resistance level. This breakthrough should be on heavier volume to improve the signal of the chart pattern.  In our bull flag example above we can see that volume did increase a little on the break.  Notice how the flag pole isn't in one piece in our Bull Flag Example.  Ideally it should be, but as long as the move is sharp over a couple of periods this should suffice.

Bear Flag Continuation
In a down trend the flag is formed either by two horizontal parallel lines, or two parallel lines pointing at an upward angle within a broader down trend.  You can see from or Bear Flag Example below how the flag is formed.  As stated above in the bull flag section you will hardly see a horizontal flag, as most will have an upward slant.  A flag seen in a down trend is called a bear flag continuation.

When the Flag consolidation is seen in a downtrend and the bottom support line is broken it’s often seen as resumption of the down trend.  The sell signal is formed once the price breaks through this support level. The breakthrough should be on heavier volume to improve the signal of the chart pattern and in general volume should decrease during the flag formation.  Once again our flag pole in the below example isn't one solid move down, but there is a definite sharp move down here.

ANN - Bear Flag Continuation Example

Key Features of the Bull and Bear Flag Continuation
  • There should be a prior trend leading to a sharp move with heavy volume forming the pole
  • The Flag is made up of a support and resistance line and will generally be pointing up in a down trend and down in an up trend.  They are consolidation points within the larger trend.
  • Generally they are short-term events lasting 1 to 4 weeks.  However they can last up to 2 to 3 months.  After this they are thought not to be valid
  • A break in support for a bear flag or resistance for a bull flag resumes the trend.
  • Volume should be large on the pole and break.  During the formation volume can decline, but not always.
  • Profit targets - Add or subtract the length of the pole to the break
Trading the Flag Continuation
Above we have two examples of The Flag Continuation.  One Bull Flag and one Bear Flag.  Below we'll look at how to trade each of these. As with many of our examples in other patterns the point of trading entry is at the break-out point of resistance or support, or sometime thereafter.  Some traders like to wait until a full candle has formed after the break, or enter after a few days.  We'll go for the break this time. 

The target for the trade will be equal to the equivalent length of the flagpole, which is extended from the break to get our target price. Our stop/loss is placed just below/above the projected support/resistance line of the flag. Again as with many pattern trades this is because we need to give our trade room to breathe and we may be mistaken on the breakout from the consolidation (The consolidation may continue).  We'll study the stop/loss in later modules.

Bull Flag Trade:
  • Bull Flag Pole length is 80 minus 52 = 28.  We add the 28 to the break at 73 to get a profit target of 101.
  • We enter the trade on the break at 73
  • Our profit could be 101 minus 73 = 28 points
  • Our stop/loss is placed just below support at 60, so if the trade went against us we loose 13 points
  • Risk Reward Ratio 28:13 = (2.15:1)  Generally traders look for 1:1, 2:1 or 3:1, but it varies. If you find that the target doesn't meet your reward to risk strategy, you wouldn't take the trade. We'll look at risk reward in later modules
Bear Flag Trade:
  • Bear Flag pole length is 6.7 pts.  We subtract 6.7 from the break of 39.05 to get a target of 32.35
  • we enter the short trade on break at 39.05
  • Our profit could be 39.05 minus 32.35 = 6.7 points (minus fees)
  • Stop/loss is placed just above resistance at 41, so if the trade goes against us we loose 1.95 points.
  • Risk Reward Ratio 6.7:1.95 = (3.44:1). If you find that the target doesn't meet your reward to risk strategy, you wouldn't take the trade.
Pennant Continuation

Bull Pennant Continuation
These are similar to the flags, but in this case the consolidation in the market narrows as the consolidation matures, forming a triangular pennant pattern. Just as the flag continuation the bull pennant can point straight ahead (below left) or angle itself downwards. The pole is set by the move upwards. In the below example you can see the narrowing consolidation and a sharp move up forming the pole. Sometimes these pole movements are hard to see, but there’s no doubt about the pennant here. The narrowing consolidation and the declining volume indicate that momentum is waning. Only when there's a break-out is the pattern confirmed.

Dell - Bull Pennant Continuation Example

Trading the Bull Pennant
Trading the pennant is like trading the flag continuation.  As with the flag the point of trading entry is at the break-out point of resistance, or sometime thereafter.  Some traders like to wait until a full candle has formed after the break, or enter after a few days.  We'll go for the break this time. 

The target for the trade will be equal to the equivalent length of the flagpole, which is extended from the break to get our target price. Our stop/loss is placed just below/above the projected support line of the pennant. Again as with many pattern trades this is because we need to give our trade room to breathe and we may be mistaken on the breakout from the consolidation (The consolidation may continue).  We'll study the stop/loss in later modules.

Trading from our Example above:
  • Bull Flag Pole length is 8.5 points.  We add this 8.5 to the break at 15.3 to get a profit target of 23.8.
  • We enter the trade on the break at 15.3
  • Our profit could be 23.8 minus 15.3 = 8.5 points
  • Our stop/loss is placed just below support at 14, so if the trade went against us we loose 1.3 points
  • Risk Reward ratio = 8.5:1.3 = (6.54:1)
Technical analysts will utilise other indicators and tools when trading this pattern.  We'll go on to talk about these in later modules, but it's something to keep in mind for now.  Often traders, with the use of other TA, may start their trade prior to the break on a pennant pattern as it's one of the more robust indicators.  Again we'll explore this later.

The Bear Pennant Continuation
The bear pennant can also be straight ahead or slightly upwards in a pennant continuation pattern. You can see from our below HP example that the pole is certainly visible as a sharp movement downwards, but not one solid move. Once the trend breaks support then the pattern is confirmed.  Once again volume has a role to play.  It increases on the pole, decreases on the formation of the pennant then increases on the break.  

HP - Bear Pennant Continuation Example

Trading The Bear Pennant
Everything we've talked about above applies here too.  Let's look at the trade using our HP example above.  In this example we will be shorting the stock.  As explained in earlier sections shorting is where traders borrow a stock from a broker, sell it, then buy it back at a lower price to make money, before returning the stock to the broker.  Of course the stock's price can go up, meaning you may loose money.
  • Bear Flag Pole length is 18  points.  We subtract this 18 from the break at 32.5 to get a profit target of 14.5.
  • We enter the short trade on the break at 32.5
  • Our profit could be 32.5 minus 14.5 = 18 points
  • Our stop/loss is placed just above resistance at 35, so if the trade went against us we loose 2.5 points
  • Risk reward ratio is 18:2.5 = (7.2:1)
Key Features of the Bull and Bear Pennant Continuation
  • There should be a prior trend leading to a sharp move with heavy volume forming the pole
  • The pole may form a trend line from the larger trend.
  • The Pennant is made up of a support and resistance line that forms a cone shape.  The slope is usually neutral. They are consolidation points within the larger trend.
  • Generally they are short-term events lasting 1 to 4 weeks.  However they can last up to 2 to 3 months.  After this they are thought not to be valid
  • A break in support for a bear pennant or resistance for a bull pennant resumes the trend.
  • Volume should be large on the pole and break.  During the formation volume can decline, but not always.
  • Profit targets - Add or subtract the length of the pole to the break
To Sum Up

While the construct of the pause (consolidation) in the trend is different for the flag and pennant, the attributes of the chart patterns themselves are similar. It is vital that the price movement prior to the flag or pennant be a strong, sharp move. Typically, these patterns take less time to form during downtrends than in uptrends. In terms of pattern length, they are generally short-term patterns lasting one to three weeks, but can be formed over longer periods. The volume, as with most breakout signals, should be seen as strong during the breakout to confirm the signal. Upon breakout, the initial price objective is equal to the distance of the prior move added to the breakout point.

Just be aware that these patterns need other technical analysis to figure them out. As always technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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Flag and Pennant chart patterns are generally seen after a big move in trend and represent brief consolidations in the market before there’s resumption in this trend - Thus they are said to be continuation patterns. Both the flag and pennant contain a flagpole, which is a brief spurt in price trend, then a ranging period bound by support & resistance.

The two patterns look like each other as we'll see later, but in essence the flag is rectangular, while the pennant is triangular.  Both act in the same way - after the period of consolidation there is break-out in the same direction as the prior trend.  The reason they form is that after a large price move up the market needs to pause and survey the market, before continuing the trend.

The pattern is basically made up of a fundamentals shock to the system then a technical consolidation. I.e. Unexpected fundamentals news (higher/ lower than expected earning etc…) leads to the pole, then there’s a period of consolidation before the trend continues. In an upside trend there will have been an increase in demand pushing prices up. Once this demand is exhausted and after the consolidation, traders jump back in to continue the trend.

The Flag Continuation

Bull Flag Continuation
The Flag Continuation Pattern is represented by a rectangle pattern formed by two parallel lines either pointing horizontally right, or two parallel lines pointing in a downward direction within a larger up-trend.  We can see this sloped flag represented in the below chart called "Bull Flag Continuation".  These parallel lines are support and resistance levels of the price and in general you'll find it hard to find a horizontal flag, as the pattern is generally sloped. (More can be read on Support and Resistance here).   A flag seen in an up trend is called a bull flag Continuation.

Bull Flag Continuation Example

When there is a beak in the resistance line (top line) in an up-trend it is often seen that the stock, commodity, f.x pairing, etc.. is about to resume it’s upward trend – A continuation.  This is seen in the above Bull Flag Chart where resistance is broken at 73 and the prior trend continues.   The buy signal is formed once the price breaks through the resistance level. This breakthrough should be on heavier volume to improve the signal of the chart pattern.  In our bull flag example above we can see that volume did increase a little on the break.  Notice how the flag pole isn't in one piece in our Bull Flag Example.  Ideally it should be, but as long as the move is sharp over a couple of periods this should suffice.

Bear Flag Continuation
In a down trend the flag is formed either by two horizontal parallel lines, or two parallel lines pointing at an upward angle within a broader down trend.  You can see from or Bear Flag Example below how the flag is formed.  As stated above in the bull flag section you will hardly see a horizontal flag, as most will have an upward slant.  A flag seen in a down trend is called a bear flag continuation.

When the Flag consolidation is seen in a downtrend and the bottom support line is broken it’s often seen as resumption of the down trend.  The sell signal is formed once the price breaks through this support level. The breakthrough should be on heavier volume to improve the signal of the chart pattern and in general volume should decrease during the flag formation.  Once again our flag pole in the below example isn't one solid move down, but there is a definite sharp move down here.

ANN - Bear Flag Continuation Example

Key Features of the Bull and Bear Flag Continuation
  • There should be a prior trend leading to a sharp move with heavy volume forming the pole
  • The Flag is made up of a support and resistance line and will generally be pointing up in a down trend and down in an up trend.  They are consolidation points within the larger trend.
  • Generally they are short-term events lasting 1 to 4 weeks.  However they can last up to 2 to 3 months.  After this they are thought not to be valid
  • A break in support for a bear flag or resistance for a bull flag resumes the trend.
  • Volume should be large on the pole and break.  During the formation volume can decline, but not always.
  • Profit targets - Add or subtract the length of the pole to the break
Trading the Flag Continuation
Above we have two examples of The Flag Continuation.  One Bull Flag and one Bear Flag.  Below we'll look at how to trade each of these. As with many of our examples in other patterns the point of trading entry is at the break-out point of resistance or support, or sometime thereafter.  Some traders like to wait until a full candle has formed after the break, or enter after a few days.  We'll go for the break this time. 

The target for the trade will be equal to the equivalent length of the flagpole, which is extended from the break to get our target price. Our stop/loss is placed just below/above the projected support/resistance line of the flag. Again as with many pattern trades this is because we need to give our trade room to breathe and we may be mistaken on the breakout from the consolidation (The consolidation may continue).  We'll study the stop/loss in later modules.

Bull Flag Trade:
  • Bull Flag Pole length is 80 minus 52 = 28.  We add the 28 to the break at 73 to get a profit target of 101.
  • We enter the trade on the break at 73
  • Our profit could be 101 minus 73 = 28 points
  • Our stop/loss is placed just below support at 60, so if the trade went against us we loose 13 points
  • Risk Reward Ratio 28:13 = (2.15:1)  Generally traders look for 1:1, 2:1 or 3:1, but it varies. If you find that the target doesn't meet your reward to risk strategy, you wouldn't take the trade. We'll look at risk reward in later modules
Bear Flag Trade:
  • Bear Flag pole length is 6.7 pts.  We subtract 6.7 from the break of 39.05 to get a target of 32.35
  • we enter the short trade on break at 39.05
  • Our profit could be 39.05 minus 32.35 = 6.7 points (minus fees)
  • Stop/loss is placed just above resistance at 41, so if the trade goes against us we loose 1.95 points.
  • Risk Reward Ratio 6.7:1.95 = (3.44:1). If you find that the target doesn't meet your reward to risk strategy, you wouldn't take the trade.
Pennant Continuation

Bull Pennant Continuation
These are similar to the flags, but in this case the consolidation in the market narrows as the consolidation matures, forming a triangular pennant pattern. Just as the flag continuation the bull pennant can point straight ahead (below left) or angle itself downwards. The pole is set by the move upwards. In the below example you can see the narrowing consolidation and a sharp move up forming the pole. Sometimes these pole movements are hard to see, but there’s no doubt about the pennant here. The narrowing consolidation and the declining volume indicate that momentum is waning. Only when there's a break-out is the pattern confirmed.

Dell - Bull Pennant Continuation Example

Trading the Bull Pennant
Trading the pennant is like trading the flag continuation.  As with the flag the point of trading entry is at the break-out point of resistance, or sometime thereafter.  Some traders like to wait until a full candle has formed after the break, or enter after a few days.  We'll go for the break this time. 

The target for the trade will be equal to the equivalent length of the flagpole, which is extended from the break to get our target price. Our stop/loss is placed just below/above the projected support line of the pennant. Again as with many pattern trades this is because we need to give our trade room to breathe and we may be mistaken on the breakout from the consolidation (The consolidation may continue).  We'll study the stop/loss in later modules.

Trading from our Example above:
  • Bull Flag Pole length is 8.5 points.  We add this 8.5 to the break at 15.3 to get a profit target of 23.8.
  • We enter the trade on the break at 15.3
  • Our profit could be 23.8 minus 15.3 = 8.5 points
  • Our stop/loss is placed just below support at 14, so if the trade went against us we loose 1.3 points
  • Risk Reward ratio = 8.5:1.3 = (6.54:1)
Technical analysts will utilise other indicators and tools when trading this pattern.  We'll go on to talk about these in later modules, but it's something to keep in mind for now.  Often traders, with the use of other TA, may start their trade prior to the break on a pennant pattern as it's one of the more robust indicators.  Again we'll explore this later.

The Bear Pennant Continuation
The bear pennant can also be straight ahead or slightly upwards in a pennant continuation pattern. You can see from our below HP example that the pole is certainly visible as a sharp movement downwards, but not one solid move. Once the trend breaks support then the pattern is confirmed.  Once again volume has a role to play.  It increases on the pole, decreases on the formation of the pennant then increases on the break.  

HP - Bear Pennant Continuation Example

Trading The Bear Pennant
Everything we've talked about above applies here too.  Let's look at the trade using our HP example above.  In this example we will be shorting the stock.  As explained in earlier sections shorting is where traders borrow a stock from a broker, sell it, then buy it back at a lower price to make money, before returning the stock to the broker.  Of course the stock's price can go up, meaning you may loose money.
  • Bear Flag Pole length is 18  points.  We subtract this 18 from the break at 32.5 to get a profit target of 14.5.
  • We enter the short trade on the break at 32.5
  • Our profit could be 32.5 minus 14.5 = 18 points
  • Our stop/loss is placed just above resistance at 35, so if the trade went against us we loose 2.5 points
  • Risk reward ratio is 18:2.5 = (7.2:1)
Key Features of the Bull and Bear Pennant Continuation
  • There should be a prior trend leading to a sharp move with heavy volume forming the pole
  • The pole may form a trend line from the larger trend.
  • The Pennant is made up of a support and resistance line that forms a cone shape.  The slope is usually neutral. They are consolidation points within the larger trend.
  • Generally they are short-term events lasting 1 to 4 weeks.  However they can last up to 2 to 3 months.  After this they are thought not to be valid
  • A break in support for a bear pennant or resistance for a bull pennant resumes the trend.
  • Volume should be large on the pole and break.  During the formation volume can decline, but not always.
  • Profit targets - Add or subtract the length of the pole to the break
To Sum Up

While the construct of the pause (consolidation) in the trend is different for the flag and pennant, the attributes of the chart patterns themselves are similar. It is vital that the price movement prior to the flag or pennant be a strong, sharp move. Typically, these patterns take less time to form during downtrends than in uptrends. In terms of pattern length, they are generally short-term patterns lasting one to three weeks, but can be formed over longer periods. The volume, as with most breakout signals, should be seen as strong during the breakout to confirm the signal. Upon breakout, the initial price objective is equal to the distance of the prior move added to the breakout point.

Just be aware that these patterns need other technical analysis to figure them out. As always technical analysis is not an exact science and although these indicators and patterns can increase the probability of making the correct trade, many will go against you and large losses can be incurred. Your own trading strategy needs to be formed and hopefully you'll be on your way to achieving this on completion of this course.

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