Flags and pennants are some of the most commonly used continuation patterns. They signal a temporary continuation of price trends before resuming to the previous trends. Do you want to learn how to apply this pattern in your binary options trading?
Flag and Pennant Patterns
Before the pattern forms, it is common to witness a high trade volume coupled by a sharp rise or decline in prices. This is especially important in determining whether the formation is indeed accurate.
What are a flag and a pennant?
A flag is characterized by a small rectangular shape that slants against the previous trend. In the event that the previous price moves up, the flag would slant down; and the opposite is true—when the price moves up, the flag would slant down. Typically, flag patterns occur very shortly and it is not easy to notice when they react to the market fluctuations.
A pennant is a tiny triangle that starts wide and becomes narrower as the trend develops. This particular pattern assumes a neutral slope. This means that when there are no highs or lows that a trader can use to draw trend lines with, what is required is for the price movement to be set in between the converging trend lines.
How to identify a flag and pennant pattern
Given that the flat and pennant pattern is a continuation formation, it is characterized by several distinct attributes:
An acute move: To confirm that a flag and pennant pattern has formed, you need to identify an acute rise or decline of the trade volume. Remember that this is a continuation pattern and there needs to be a prior trend before this formation can take place. The acute rise or decline simply signals a substantial rise or decline in trade volume. As such, the formation of the flag and pennant serves only as a recess prior to the resumption of the trend.
Time: The flag and pennant pattern forms only for a short time, with the longest duration lasting for just 12 weeks. Typically, this pattern lasts about 1 to 4 weeks most of the time. If a flag lasts for more than 12 weeks it is regarded as a rectangle and when a pennant lasts for more than 12 weeks it would lose its original symmetrical shape to become asymmetrical. Admittedly, patterns that extend to over 8 weeks may not offer the most significant signals.
Formation of a flag pole- The flagpole signifies the distance between the initial support or resistance and the high or low point of either the flag or the pennant. It is characterized by an acute decline or advance that breaks the support or resistance level. The flagpole is thus formed when a trend line forms between this break and the high or low point of either the flag or the pennant.
Level of volume: During the formation of the flagpole when there is a sharp rise or decline, it is expected that the volume will be high. In fact, the occurrence of heavy volume validates the formation of the flag and pennant pattern and is an indication that the prevailing trend will proceed.
Occurrence of a break: When a bearish pennant or flag forms, the break that forms below the support level signifies the resumption of the previous price decline. On the other hand, when the pattern is bullish, a break forms above the resistance level and this signifies the resumption of the previous price rise.