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
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Existing Holders:
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If no breakout occurs within four weeks, consider selling, especially if volume doesn’t behave as expected.
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Sell immediately if price breaks down below the flag.
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Prospective Buyers:
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You may enter once the flag pattern is clearly formed with healthy volume—even before the breakout.
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For Pennants
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Existing Holders:
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If no breakout happens within four weeks of formation, or if volume fails to contract normally, consider exiting.
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Sell immediately on any downside breakdown.
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Prospective Short-Term Buyers:
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You can initiate a position once the pennant takes shape with supportive volume, without waiting for the actual breakout.
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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.
