Flags and Pennants
What are Flags and Pennants?
Flags and pennants are very short consolidation periods that appears within a fast moving trend. Both are preceded by a sharp move that is nearly a vertical line, and both show consolidation against the direction of the trend. The flag is a pattern formed by two parallel lines sloping against the trend, while the pennant is a pattern of two converging lines that appear very similar to the triangle or the wedge formation.
Flags and pennants are some of the most common and reliable continuation patterns. These formations occur after sharp price moves, usually in the middle of steep price trends. The flag resembles a small rectangle sloping against the dominant trend. The pennant looks very much like a small symmetrical triangle.
Both of the patterns are completed when the prices break through one of their trendlines – the upper trendline in up trends and the lower trendline in down trends. You can use the same measuring technique for flags and pennants: find the distance from the point when the prices started to fall or rise sharply to the first point of the pattern and project this distance down or up from the level of the breakout.
A Flag consists of 2 parallel trendlines (support and resistance) that slope against the previous trend. The Pennant consists of two converging trendlines that begins wide and converges and is a very short term Symmetrical Triangle.
The flag and pennant patterns are two continuation patterns that closely resemble each other, differing only in their shape during the patterns consolidation period. This is the reason the terms flag and pennant are often used interchangeably. A flag is a rectangular shape, while the pennant looks more like a triangle.
These two patterns are formed when there is a sharp price movement followed by generally sideways price movement, which is the flag or pennant. The pattern is complete when there is a price breakout in the same direction of the initial sharp price movement. The following move will see a similarly sharp move in the same direction as the prior sharp move. The complete move of the chart pattern – from the first sharp move to the last sharp move – is referred to as the flag pole.
The flag or pennant is considered to be flying at half-mast, as the distance of the initial price movement is thought to be roughly equal to the proceeding price move. The reason these patterns form is that after a large price movement, the market consolidates, or pauses, before resuming the initial trend.
How to trade these patterns?
Always trade Flag and Pennants in the direction of the previous (main)trend:
(1) If the previous trend was up, wait for a breakout to the upside and go long when the currency pair rises above the upper resistance trendline.
Place your stop a few pips below the lower support trendline.
(2) If the previous trend was down, wait for a breakout to the downside and go short when the currency pair falls below the lower support trendline.
Place your stop a few pips above the upper resistance trendline.
