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 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.
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.
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.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.
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.
Key Features of the Bull and Bear Pennant Continuation
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 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.
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.
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.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.
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.
Key Features of the Bull and Bear Pennant Continuation
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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