Flag formations often signal continuation in strong trends. Learn how to trade them effectively.
Flags occur after a sharp price move forms the "flagpole" and a brief consolidation drifts against the prevailing trend. The pattern resolves when price breaks out in the direction of the original move.
A bullish flag is marked by downward-sloping highs and lows following a rally, while a bearish flag tilts higher during a decline. Volume typically dries up during the consolidation and expands on the breakout.
Traders often enter as soon as the flag boundary is broken, placing stops inside the pattern. Targets are commonly measured by projecting the length of the flagpole from the breakout level.
Because flags develop quickly, monitoring multiple time frames helps confirm the broader trend before committing capital.