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17. Flags and pennants

In this lesson, we’ll cover Flags and Pennants—two short-term continuation patterns that frequently appear in financial markets. These highly reliable setups signal the resumption of the prior trend’s momentum.

Flag

Characteristics:
A flag forms after a sharp, nearly vertical price move. It looks like a small rectangle sloping against the direction of the preceding trend.

Volume:
Volume should contract significantly during the flag’s formation.

Measured Move:
After the breakout, the expected price move should be at least equal to the size of the initial flagpole (the move preceding the flag).

Breakout Timing:
A valid breakout typically occurs within 20–30 days of the flag’s formation. An increase in volume on the breakout confirms the signal.

Pennant

Characteristics:
Like the flag, the pennant forms after a vigorous price move. It takes the shape of a small, symmetric triangle (a mini-parallelogram) that tilts against the direction of the prior trend.

Volume:
Volume likewise dwindles during pennant formation.

Measured Move:
The anticipated price move after the breakout equals the length of the flagpole leading into the pennant.

Breakout Timing:
A classic breakout should occur promptly—ideally within 20–30 days from the pennant’s inception.

Trading Tactics

For Flags

  • Existing Holders:

    • If no breakout occurs within four weeks, consider selling, especially if volume doesn’t behave as expected.

    • Sell immediately if price breaks down below the flag.

  • Prospective Buyers:

    • You may enter once the flag pattern is clearly formed with healthy volume—even before the breakout.

For Pennants

  • Existing Holders:

    • If no breakout happens within four weeks of formation, or if volume fails to contract normally, consider exiting.

    • Sell immediately on any downside breakdown.

  • Prospective Short-Term Buyers:

    • You can initiate a position once the pennant takes shape with supportive volume, without waiting for the actual breakout.

Closing Notes

Flags and pennants offer high-probability continuation setups—provided you see proper volume behavior and a timely breakout. Always confirm the move with rising volume and ensure the post-breakout price swing matches the height of the formation. These patterns give trend-following traders clear entry and exit levels for disciplined execution.

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