Trading strategy: Flag Pattern

Description

The flag is a pattern. A pattern is recurring combination of candles (or bars). Individual candles are of limited value to traders. Patterns are much more interesting. The flag pattern was originally developed for the forex market to capture break-outs which characterize this market. It can, however, be applied to indices, commodities or individual stocks.


  
Suitable for : Market indices (FTSE, DAX, AEX…)
: Forex (EUR/USD, GBP/USD ...)
: Commodities (oil, gold…)
: Shares
Instruments : Futures, CFDs and Forex
Trading type : Day trading
Trading tempo : 2-3 Signals per week
Using NanoTrader Full : Manual or semi-automated

 

The strategy in detail

The pattern consists of a "flagpole" (a) followed by a "flag" (b). The flag consists of at least 2 candles and maximum 10. These candles need to be within the extremes of the second and third flagpole candles.



 

This example shows a bullish flag pattern (green background). The flag consists of the minimum two candles.


The Flag pattern strategy is used for day trading on a 15-minute chart. Signals are relatively rare. Active investors who want to use this pattern should work with multiple instruments. If they do not want to monitor each instrument themselves they can simply work with LiveTables.

When to open a position?

A buy signal occurs when the market price moves above the high of the third candle in the flagpole of a bullish Flag pattern.

A short sell signals occurs when the market price moves below the low of the third candle in the flagpole of a bearish Flag pattern.

 

This example shows a bearish Flag pattern (red background). When the market price goes below the low of the third candle in the flagpole a short sell position is opened.

When to close a position?

The strategy combines two different stops and a profit target. The profit target is 5 times the Average True Range (ATR). This is fairly wide and serves to capture even the biggest break-outs.

The two stops to protect the position are a fixed stop and a trailing stop. The fixed stop is placed either on the low (for a long position) of the second candle in the flagpole or the high (for a short position) of the second candle in the flagpole. The trailing stop is 5 times the average true range (ATR) calculated over 60 periods.

Attention
: the NanoTrader Full trading platform allows users to enter many stop types in parallel. The platform will at any time use the safest stop i.e. the stop which would lead to the smallest loss. So the trailing stop becomes the active stop when its level moves above the level of the fixed stop.

 

This example shows a bearish Flag pattern (red background). A short sell position is opened. However, the market turns and the stop is hit. The position is closed with a loss.


 

This example shows a bullish Flag pattern. A long position is opened on the break-out. Before the profit target (green line) is reached the market turns and the position is stopped out with a small profit.


 

This example shows a bullish Pennant pattern. A long position is opened. The profit target (green line) is reached and the position is closed with a profit.

 

Conclusion

The Flag pattern strategy is a day trading strategy. The strategy focuses on short, sharp price break-outs. This focus makes it useful for the forex markets. Signals are rare. About two or three signals per instrument per week is the norm. Traders using this pattern should work with multiple instruments. Although this strategy is explained here on the basis of 10-minute charts, swing traders can easily put their charts on 1-day and also use the pattern. In this case it is probably advised to use the Scripts functionality in the platform to detect the signals every morning.

Practical implementation

In NanoTrader Full follow these steps:
  • Choose the instrument you wish to trade.

  • Open a chart with the template study "WHS Flag".

  • Semi-automated trading? Simply activate the TradeGuard+AutoOrder or the AutoOrder function.