A flag is a continuation pattern, and represents a period when the price action pauses in the midst of a strong trend. A flag occurs typically after a particularly strong market move, and represents a period of retracement as traders who caught the initial move take profit. Once traders are satisfied that the price of the asset has retreated to a “cheaper” level and that there is potential for a renewed round of movement in the initial trend, they will re-enter, sending the asset price back in the direction of the initial trend. If you can picture the way a flag of a country looks on a mast, then you can recognize flag patterns.
There are two types of flag patterns:
- Bullish flag patterns, which occur in the middle of an uptrend as a period of mild downward retracement.
- Bearish flag patterns, which occur in the middle of a downtrend as a period of mild upward retracement.
Bearish flag pattern
Bullish flag pattern