Flag patterns is so called because actually it has the form of a flag, this formation occurs in very marked trends ( almost verticals ) and represents a moment of “calm”market.
The volume is reduced both uptrend and downtrend, after the flag patterns the trend resumes the previous direction.
The geometric shape that is formed is a parallelogram, the lines that make up the flag are almost vertical and show a slight downward trend in bullish trend and a slight upward trend in the bearish trend, this feature is often seen, but not always.
FLAGS IN BULLISH TREND
The flags that are formed in the bullish trend are almost always facing downwards, the volume is very high just before training begins, while the model is developing instead there has been a decrease in the volume that is usually very visible because tends to disappear and then explodes as soon as the money comes out of the training. Usually flag patterns are presented approximately to half of the reference trend, the time of the flag formation varies from 5 days to 3-5 weeks.
FLAGS IN BEARISH TREND
This pattern is very similar to what occurs in bull markets, the difference lies in the fact that the flag tends slightly upwards. The volume behaves in exactly the same way, ie, tends to decrease gradually until it takes form the flag, at the breaking of the formation, however, it is not necessary that the volume rears up as must happen in the bullish markets. The tendency, after the breaking of the formation, continues in the same direction as before.
BEWARE OF FALSE SIGNALS
The important thing to make sure when we’re watching flag patterns is that the volume decreases noticeably during the formation, another essential requirement is that the flag doesn’t last more than 4 weeks. The duration is important because the flag patterns is a temporary interruption of the trend due to the willingness of investors to cash in profits, to do so you do not need too many days, then the formations that last too long could hide side phases and the price could suffer a inversion.
Flags, because of their duration have to be found in less than one week time frame. Also, the flag pattern is one of the most reliable models of technical analysis and also give us important operative signals such as:
The price direction
The bullish trend duration
The price direction is equal to the previous one, while duration is the other 50% of previous trend, since the formation usually occurs in the middle of a bullish trend.
CAUTIONS: Despite the flag patterns is very reliable you shouldn’t invest all of your capital, in trading you must always keep in mind that the market can basically go wherever he wants, we just follow it, but we do it on tiptoe, splitting our capital in order to always have the odds in our favor.