Flag and pennant: trend takes a break
A flag is a continuation pattern where the price rests in a short and narrow band after a sharp move (the pole). A pennant is the same break, but in the shape of a contracting triangle.
In the chart above, you see two points marking the start and end of a sharp move: ‘POLE START’ and ‘POLE END’. Following them, the short area where the price rests is framed as ‘FLAG’. Green color indicates a bull flag (break after an uptrend), red color indicates a bear flag (break after a downtrend).
A flag is a continuation pattern: it doesn't create a new direction, it shows the existing direction taking a breath. First, there's a large move in a short time; this is called the pole. The pole usually comes with high volume, because money has quickly entered or exited the market. Then, the price moves sideways for a while in a narrow band, often slightly tilted against the pole's direction. This is a break where profit-takers' sales are met by new buyers. Volume is expected to decrease during the break: no one is exiting in a panic.
A pennant tells the same story; the only difference is that the resting area is not a parallel band, but a small, contracting triangle. In our system, this situation might appear as a 'symmetrical triangle'.
The meaning of the pattern emerges with the breakout. In a bull flag, if the price closes above the upper boundary of the flag, the trend may continue from where it left off. The classic target is to project the length of the pole from the breakout point. But if the flag breaks downwards, meaning the price loses the bottom of the break, what you thought was a 'break' is actually the beginning of a reversal.
The duration of the flag is also important. Short breaks are signs of strong trends. As the break lengthens, the energy in the pole dissipates, and the flag ceases to be a flag and turns into an ordinary sideways band.
How to read it
- First, find the pole: it should be a sharp move that comes in a short time with significant volume.
- Check that the break is narrow and short; a correction that retraces a large part of the pole is not a flag.
- Confirm the breakout with a close and, if possible, with an increase in volume.
- Place the stop at the other end of the flag: below the bottom of the break in a bull flag.
Trap
Mistaking every sideways movement for a flag is the most common error. The prerequisite for a flag is a pole; if there's no sharp move, there's no flag. The second trap is to consider a decline that retraces a very large part of the pole as a 'break'. If the price gives back more than half of the pole during the break, the strength of the trend is broken. The third is to open a trade inside the flag without waiting for the breakout: a flag can break in either direction.
Tip
Combine what you learned in the volume lesson here: if volume is high in the pole, low in the break, and high again at the breakout, the flag is working as described in the textbook. If volume increases during the break, be careful; this could be a sign of a quiet exit.
Glossary
- Pole
- A sharp price movement that occurs in a short time, preceding the flag.
- Flag
- A continuation pattern where the price rests in a narrow and short band after the pole.
- Pennant
- A type of flag where the break is in the form of a small, contracting triangle.
- Continuation pattern
- A structure that does not create a new direction, but indicates a break in the existing trend.
Mini quiz
Try it now
Look for the pole and break in an analysis →For information only, not investment advice.