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Technical analysis or Charting allows investors to use a range of patterns to assist them with timing their entry to and exit from positions. Flags, essentially continuation patterns like triangles and pennants, are some of the most helpful within a trending market – rising or falling – signalling that after a short pause the prevailing trend should continue.
Flags exist in both Bullish and Bearish form and each can be split into 3 distinct sections;
The above trading example shows a 130p rally (930-800p) followed by a 70p flag decline (930-860p), followed by a repeat 130p rally (860-990p).
The initial sell-off into the flag – the flagpole – can be steep or gradual.
The above trading example shows a 400p sell-off (3440-3040p) followed by a 160p flag rally (3040-3200p), followed by a repeat 340p sell-off (3200-2860p).
Whilst trade objectives are calculated by assuming and projecting a repeat of the initial up or down move, note that Bullish or Bearish flags don’t always deliver exactly the same move. Sometimes they undershoot. Sometimes they overshoot. And the flag itself is not always a neat rising or falling channel. What is most important is that overall pattern respects the general steps mentioned above.
Individual technical indicators should never be relied upon in isolation for trading decisions, however strong the signal may be. Ultimately they are one of many indicators, which may, in the majority, be pointing the other way. Always use look at other indicators (moving averages, trendlines, price, price patterns, volume) to assist in the final trading decision. Lastly, the current trend of a share should always be respected – preempting a change can prove costly.