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How to identify flags and pennants

In Trading

Flags and pennants are common chart patterns that often occur in strong trending markets.

Structure-wise, flags and pennants are both characterized by a large impulse move in the direction of the trend (also called a pole), followed by a consolidation pattern.

A flag’s consolidation pattern is more rectangular in nature, while pennants consolidate into a triangle.

After the consolidation phase, flags and pennants typically breakout in the direction of the trend with a price target that is approximately equal to the pole.

Bull flags and pennants

When dealing with flag and pennants, remember that a breakout is only valid with a price surge that surpasses the top of the pole.

Thus, price targets for flag and pennant breakouts are calculated from the price that represents the top of the pole.

Here’s an example of a bull flag on the ETH/USD 15-minute chart.

ETH’s 3.7% move from 149-154.5 USD forms the pole. After a rectangular consolidation pattern, ETH experiences a breakout and makes a 3.6% move from 154.50-160 USD.

Notice how we didn’t calculate the breakout target from 153 USD, which appears to be the start. Instead, we calculated the breakout starting at 154.50 USD, the top of the pole.

In the BTC/USD 4-hour chart below, there is a bull flag (yellow) and bull pennant (orange).

The bull flag is formed with a strong 11% move from 3,350-3,710 USD. After the bull flag, BTC makes another strong 7.4% move up from 3,710-3,986 USD, which is followed by a pennant formation.

As mentioned above, a flag consolidates into a rectangle, while a pennant consolidates into a triangle.

Finally, BTC experiences one more breakout from 3,986-4,188 USD before a large retracement down to the 0.5 Fibonacci level.

Price targets don’t always end up being equal to the length of the preceding pole. In real-world trading, watch other indicators like RSI and volume to identify a profitable exit price.

In the example above, entering a long position after the bull pennant (orange) breakout would have resulted in a nice 5% gain.

However, if you were dead set on waiting for a 7.4% gain matching the length of the pennant pole, you would have ended up in a losing trade after the dump down to 3,766 USD.

Trade Bitcoin

Bear flags and pennants

Flags and pennants also have bearish variations.

In the BTC/USD 1-hour chart below, you can see a bearish pole that extends from 6,300-5,200 USD – a 17.5% decline.

Following the impulse move, BTC corrects into a triangular pennant formation before experiencing a 20% breakdown to 4,200 USD.

Finally, we have an example of a bearish flag on the XRP/USD 15-minute chart below.

A 5% impulse move from 0.379-0.357 USD forms the flag pole. Following a rectangular correction to the upside, XRP experiences another 5% breakdown from 0.357 to 0.339 USD.

Trade XRP

Conclusion

Flag and pennants don’t always play out the way you expect them to, so it’s wise to always set a proper stop loss order when entering positions.

Flag and pennant price targets shouldn’t be taken too seriously. Build in a buffer zone that works with both the asset and timeframe being traded.

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

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