103

6.3. Flags

Trade Chart Patterns Like The Pros

104

Bull Flag
"Flags" are continuation patterns representing a small pause in the market trend. They can be
easily spotted as they appear right after a sudden and quick burst from a trading range. In
dynamic and quick markets, Flags form as prices pause and move in the same direction as the
prior trend after a clear breakout. Flags are known to be very reliable patterns.

"Bull Flag" patterns can be spotted when the market breaks out from a range and makes
"lower highs" and "lower lows" in a tight formation. The trend lines connecting these highs
and lows are near parallel. Also, tight and well defined "flags" perform better than short and
zigzag "flags."

Trade:
After a series of "lower highs" and "lower lows," connect prices with two parallel trend lines.
Wait for a clear breakout to the upside. Price closing outside the upper trend line is the first
sign of a breakout. Enter a "long" trade one tick above the high of the breakout bar. Another
clear signal of a "Bull flag" breakout occurs when prices trade above the recent "swing high".

Target:
Measure the prior distance from the "swing low" at point A to the "flag" formation at point B.
Target 70% to 100% of this range from C. Secondary targets in bull markets are 138% to
162% of AB from C.

Stop: Place a "stop" order below the "low" of the "flag."

............... ---- - T

Bull Flag

_._." .....
I bll~ i

,,
Base

Trade Chart Patterns Like The Pros

 105

Trading a Bull Flag

-----_ .. -_. - ._--

@ERl.D - 610 Tick Bars l= 787. 70 +4.90

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-
Bull Flag Pattern

794.00

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A
10:11 10:40 11:13 12:03 13:34 15:06 1!16 9:48 10:09 10:42 11:27 12:39

Trading A Bull Flag

The chart above illustrates a "Bull flag" trade from the Russell Emini futures (ER2) 610 tick
chart. After a rally from "A" on January 15, 2007, the ER2 made a "swing high" at "B" and
formed a "Bull flag" with a series of "higher highs" and "lower lows". A late day rally
triggered a breakout from the top trend line as prices "closed" above the previous "swing
high" at 797. A long trade is entered with a "stop" order at 795 (below level C). Targets are
set at 70% tol00% of the AB range from C and 138% to 162% of the AB range from "C".

L __
Trade Chart Patterns Like The Pros
106

Bear Flag
"Bear Flags" usually occur as markets fall from a base and pause in a downtrend. They are
almost identical to "Bull flags," but in the opposite direction. "Bear flags" can be easily
spotted as they make "higher highs" and "higher lows" within the "flag" area. The trend lines
connecting "highs" and "lows" are almost parallel. A clear breakdown confirmation is needed
to trade these patterns as the price continues in the same direction prior to the "flag" formation.
Like "Bul1 flags," "Bear flags" are also very reliable.

Trade: After a series of "higher high" tops and "higher low" bottoms, prices will breakout of
the lower-trend line. Wait for confirmation of breakdown with a long range bar. One of the
best confirmations occur when prices "close" below a previous "swing low" (of bear flag).
Enter a "short" trade one tick below the "swing low" or previous bars' low.

Target: A typical target in "Bear flags" is from 76% to 100% of the AB range prior to the
"Bear flag". The secondary targets are from 138% to 162% of the range AB.

Stop: Place a "stop" order above C to protect the "short" trade.

Quick Fall
["w~l.

no.

Bear Flag

Trade Chart Patterns Like The Pros

 107

Trading a Bear Flag

r-- --_ ... _- --_. __ . -------- .. - . _.. _ ..__ .. - _ ... - .- .

@NQD - Daily L=1806.75 +0.75 .--- __ -----,

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1680.00 i
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1660.00

1640.00

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Trading A Bear Flag Pattern

The example above illustrates a "Bear flag" formation from the Nasdaq Emini futures (NQ)
daily chart. In March 2005, NQ made a swing high (A) and by late March 2005, NQ prices
sold-off to 1580 level. A retracement of38% into the AB swing (at C) formed a "Bear flag".
A breakdown bar (in the prior down trend direction) below the trend line (at C) gave a short
trading opportunity.

1. Enter a "short" trade below the low of the breakdown bar (at 1580).
2. A "stop" order was placed above the "high" of the top trend line (swing high).
3. Targets were set at 70% to 100% of the AB range prior the "Bear Flag" from C.

Trade Chart Patterns Like The Pros

108

Trading Bull and Bear Flags

@ER2.D - S min L=816.60 -0.20

I Bull and Bear Flags I

B 800.00

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Trend Direction

Source: T r adeSl atim

12:oOD 14:00 ,1,'26, " 12:9. ....... 14,:110 1!29

Trading Bull and Bear FJags

The example above illustrates "Bull" and "Bear" flags from the Russell 2000 chart. Intraday
charts produce more opportunities to trade "Flags" as the results will be known quicker than
day or longer term charts. "Flag" patterns are continuous patterns and trades are only taken in
the direction of the current major trend. In the chart above, "trade" A is taken in the direction
of a major trend after a breakdown bar from "bearish flag." A "short" trade is triggered below
the low of the breakdown bar. A "stop" order is placed above the high of the "flag. Targets
are set at 70 to LOO% range of the "Flag." Similarly. a "long" trade B is triggered in the
uptrend. A "stop" order is placed below the low of the "flag" pattern and a "target" is set at 70
to 100% range of the "Flag."

Trade Chart Patterns Like The Pros