Flag pattern

In technical analysis, a flag is a price pattern that can appear in both a bullish and a bearish form. It is generally regarded as a continuation pattern: it appears as a correction within an intact trend and suggests that the trend is likely to resume once the correction is over.

How a flag forms

A flag consists of two parts. First comes a strong, almost vertical price move – the "flagpole". This is followed by a short, orderly correction in a narrow channel that runs slightly against the previous move – the "flag" itself.

• A bullish flag is a correction in an uptrend, usually preceded by a strong upward move. It tends to drift sideways or slightly downwards.
• A bearish flag is a correction in a downtrend, usually preceded by a strong downward move. It tends to drift sideways or slightly upwards.

Example: a share rises from $40 to $50 within a few days. Over the next few sessions, it then eases back to $48 in a narrow, slightly falling channel. If the price then breaks above the upper edge of this channel, chart analysts see this as a signal that the uptrend is continuing. A common rule of thumb projects the length of the flagpole – here $10 – from the breakout point as a possible price target, but there is no guarantee that this target will be reached.

Volume often declines while the flag is forming and picks up again on the breakout.

Why flags matter for traders

Flags allow traders to enter in the direction of the prevailing trend after a correction, instead of chasing a move that is already well advanced. The pattern also provides a logical place for the stop-loss: below the low of a bullish flag or above the high of a bearish flag (see stop rules). If the price breaks out of the flag against the trend, the pattern has failed. A closely related pattern is the pennant, in which the correction forms a small symmetrical triangle rather than a channel.