In our last lesson we learned about the flag and pennant chart patterns, how to identify them on a chart, and when the pattern is a bullish or bearish sign. In this lesson we are going to learn how to identify entry and exit points for potential trades after spotting these patterns on a chart.
As we learned in our last lesson when you spot a flag pattern in an uptrend this is a bullish sign as the market consolidation which forms the flag is seen as a pause before a resumption of the original uptrend. As this is the case when traders spot these patterns on a chart they will commonly look to enter a buy position. The entry point which they will commonly use to enter the long position is the breakpoint of the upper line of the flag which is resistance. The target for the trade is then calculated by measuring the distance between the start of the up move and the highest point on the flag and then projecting that upwards. The stop is then placed just below the bottom support line of the flag.
Example of the Bull Flag Trading Strategy:
The strategy is exactly the same for the bull pennant, with one exception. When trading the bull pennant the stop loss is placed just below the bottom trend line, in line with the closest trough.
Example of the Bull Pennant Trading Strategy:
When you spot a flag pattern in a downtrend it is a bearish sign as the market consolidation which forms the pattern is seen as a pause before a continuation of the original downtrend. As this is the case when traders spot this pattern on a chart they will commonly look to enter a short position. The entry point that is normally used when trading this strategy is to sell on a break below the bottom support line. The target is then calculated by measuring the distance between the start of the down move and the lowest point on the flag and then projecting that downwards. The stop is then placed just above the upper resistance line of the flag.
Example of the Bear Flag Trading Strategy:
The strategy is exactly the same for a bear pennant, with one exception. When trading the bear pennant the stop loss is placed just above the upper trend line, in line with the closest peak.
Example of the Bear Pennant Trading Strategy:
So that completes this lesson. You should now have a good understanding of the strategies used to trade flag and pennant patterns as well as how to identify these patterns on a chart. In our next lesson we are going to look at the triangle chart pattern and how to spot this on a chart so we can look at ways to trade that continuation pattern. So we hope to see you in that lesson.
