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Flag and pennant chart patterns are short-term continuation patterns that are formed when there is a sharp price movement followed by a sideways price movement. This pattern is then completed when another sharp price movement heads in the same direction as the move that initiated the trend. Flag and pennant chart patterns are usually short lived, lasting generally between one and three weeks.

There is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trendlines, much like what is seen in a symmetrical triangle.

2.2.1 What is Flag Patterns?

The Forex Flag pattern is one of the best-known continuation formations in trading. It is an on-chart figure, which typically appears as a minor consolidation between impulsive legs of a trend. When this pattern forms on the chart, there is a high likelihood that the price action will breakout in the direction of the prevailing trend.

There are two types of Flag chart patterns based on their structure and potential – a bearish Flag and a bullish Flag.

Bearish flag pattern

A bear flag pattern is constructed by a descending trend or bearish trend, followed by a pause in the trend line or consolidation zone. The stronger the move, the bigger the profit potential is. It indicates a continuous downtrend.

In the daily chart, we can understand that the bear flag pattern highlights a trading environment where the supply and demand balance has shifted badly in one direction of the market (supply > demand). In turn, this will produce very little upside retracement. After the initial sell off, people who missed the train will panic and begin selling. More people will sell it during the flagpole stage. During the pause or the narrow consolidation, people wait to get a higher price so they can sell. But since the supply and demand equation is so imbalanced, this won’t happen. We get another smash that will make many people chase the move to the downside again.

Traders should enter on the flag break or on the break of the high of the flagpole.The first entry is an early entry that allows the trader to capitalize on an initial move back to the high of the flagpole before the price rejects or breaks out. The stop loss should be placed lower trendline on downtrends, as a precautionary trail stop for insurance. Once you entry a flag pattern, the targets can be derived from different market trend, but the initial targets on all flag patterns will be the high of the flagpole.

Bullish flag pattern

The Bullish Flag pattern is the absolute opposite of the Bearish Flag pattern in appearance. First, it forms during bullish trends. The pattern begins with a bullish trending move, which then pauses and turns into a minor bearish correction. The tops and the bottom of this correction are parallel as well.

On bull flags, the bears get blindsided due to complacency as the bulls charge ahead with a strong breakout causing bears to panic or add to their shorts. Once the stock peaks out, the bears regain some confidence as