We’re going to cover the next patterns in our TA series, Flags & Pennants, both of which are Forex continuation patterns.
Flags and pennants form when price rallies, consolidates sideways or retraces slightly, and then continues in its previous direction. This consolidation period takes the shape of a rectangle (flag) or a small triangle (pennant). When identifying flags or pennants, traders should draw trendlines along the highs and lows of the consolidation/retracing phase. The steep rise leading up to the flag or pennant is known as the ‘flag pole’.
Typically, this flag or pennant pattern is followed by another steep rise in price. And that’s exactly where the trade opportunity exists. As soon as price breaks out above the flag/pennant upper trendline, it’s time to enter a long trade. The opposite occurs for bearish flags/pennants, the only difference is that instead of a sharp rise, preceding price action is a sharp fall.
When trading flags & pennants, traders can place their stops above/below the high/low of the pennant/flag, depending on whether it’s a bullish or bearish setup.
When determining your target area, we use the height of the flag pole and add that to the breakout area to provide a potential target. The idea with flag/pennant patterns in the Forex market is that there is already significant momentum shown in the previous swing, so we can expect that momentum to continue after a momentary consolidation.
Source: Vantage FX Blog