What is the Flag and Pole Pattern in Trading?

The flag and pole pattern serves as a technical analysis tool that typically depicts the continuation of an upward or downward trend of asset prices after making a brief consolidation. In India, where 19.43 crore people trade in the stock market, this pattern can help make potential benefits. If you are into trading, learn about the flag and pole chart pattern, strategise accordingly and increase the chances of potential profit.

Decoding the Flag And Pole Pattern In Technical Analysis

Among traders, there are about 42 recognised chart patterns, and this flag and pole pattern is one of them. Depending on the supply and demand, the flag and pole chart pattern works. Therefore, when strong price movements of a certain asset occur, it creates a surge in either buying or selling. This generates the pole of the flag in the chart.

Suppose a stock price jumps from INR 500 to INR 650 in a shorter span. It might be the signal for a strong buying momentum, and thus drives its price upward. Here, the pole is formed. After such a price movement, buyers may take a step back and reassess the market moves further.

This leads to a consolidation pattern which forms its flag. Suppose the price range is now between INR 645 and INR 655. Now, the breakout happens after the flag formation in the direction of the initial surge. In this example, if prices go above INR 655, then traders might consider this breakout as a continuation of the trend.

Different Types Of Flag and Pole Patterns

Now that you know the basics about the pole and flag pattern, you must take note of the 2 types:

1. Bullish Flag and Pole Pattern

   As the name suggests, the pole of this pattern forms when the price of a certain asset goes upward initially. After the pole formation, a temporary pause in the upward movement occurs, resulting in sideways trading and creating a flag-like pattern. Now, if a breakout happens above the resistance level of the flag, it indicates a potential market entry point.

2. Bearish Flag and Pole Pattern

   A bearish pole pattern appears when there is downward movement in an asset’s price. Then, if a consolidation phase follows sideways, it creates a pattern of a flag. Now, a breakdown below its support line indicates a potential entry point for a short position.

How to Identify a Flag and Pole Pattern in a Chart?

To identify profit-making opportunities, here is how you can identify and use this pattern as a strategy:

1. Flag Formation or Shape

   When there is any sharp movement and asset prices either go upwards or downwards, it forms a pole. A flag gets created if a consolidation follows after the pole creation. Also, the portion of the flag typically creates a rectangle and slopes in the opposite direction of the pole.

2. Trade Volume

   To identify a pole and flag pattern in a chart, you can also consider the concurrent trading volume. For example, when the flag forms, trading volumes usually decrease. It indicates that a reduced portion of traders are now participating in the market, and a potential breakout might be near.

3. Confirmation of a Breakout

   Now, when there is a breakout from the flag consolidation phase, supported by rising volume, it confirms continuation of its prior trend. Rising volumes mean more buying in case of a bullish breakout or strong selling in case of any bearish breakout.

4. Duration of Flag and Pole Pattern

   When you have identified the flag and pole pattern successfully, you must have an idea of how long such a pattern might stay before it breaks out. On average, such patterns might stay for 1 or 2 days and up to several weeks before any breakout happens.

3 Effective Trading Strategies for Flag and Pole Patterns

1. Market Entry for Trades

   When this pattern forms, you must look for the following indications in a pole and flag pattern before you make a market entry:

   • Similar to other charts as an indicator, you might also misinterpret this one. To avoid these, wait for till the breakout happens,
   • Suppose you plan to enter any long position, wait for prices to rise above the consolidation. For instance, a stock moves sideways between INR 195 and INR 200 and then breaks above INR 200. Once the price crosses INR 200, it might be an entry point.
   • If you are planning to short, enter the market after the price falls below the support level of the consolidation. For instance, a stock trades between INR 150 and INR 155 and then drops below INR 150, which indicates a potential entry for a short position.

2. Target Profits

   Strategy for the pole and flag pattern typically depends on your risk tolerance level, and here is a clear breakdown:

   • In case you are a conservative investor, your ideal margin should usually be the difference between the support and resistance levels during the consolidation. As a risk-taking trader, you might want to add the profit range from the pole to your margin.
   • Suppose stock prices of a certain asset rise from INR 100 to INR 110, then dip and form a consolidation between INR 110 and INR 107.
   • A breakout follows up beyond INR 107. Here, the difference during consolidation is INR 110 – INR 107, i.e. INR 3. The price range of the pole is INR 110 and INR 100, i.e. INR 10.
   • Thus, the ideal target profit or exit point for a conservative one is INR 110 (i.e. INR 3 past the breakout price). For risk-taking traders, the ideal point might be INR 117(i.e. INR 117 past the breakout price).

3. Stop-loss Application

   You must also set a stop loss when you locate a flag and pole pattern in a chart:

   • In a bullish flag, you might want to set it at the support level or at the bottom of the flag.
   • Set the stop-loss at the resistance level or at the top of a bearish flag.

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Advantages of the Flag and Pole Pattern in Trading

As advantages, it helps with risk management, spotting trend continuation, etc., as described below:

• It helps with risk management for participating traders. This is because it helps identify the potential entry and exit points in the market if analysed effectively.
• It has the potential to act as a reliable indicator of the continuation of a strong trend. Thus, when traders spot this pattern, it builds confidence in them that the momentum is likely to persist.

Limitations of the Flag And Pole Pattern

False breakouts, short-term effectiveness are some of its drawbacks:

• It might happen sometimes that a price breaks out and immediately reverses and gets back in the flag. This might lead to losses.
• This pattern is effective for short to medium-term trades. It might not be that effective for longer trades.

Conclusion

A flag and pole pattern usually forms when there is a strong price movement followed by a phase of consolidation. Such moves create a pole and a flag, which indicates a potential breakout.

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FAQs on Flag And Pole Pattern

1. What is the time frame for the flag and pole pattern?

While there is no fixed time frame, when it appears, it might stay for a few days to a few weeks.

2. How can I improve flag pattern trading?

As a trader, you can establish a strategy focusing on the entry, profit target and stop loss to reap potential gains.

3. What is the flag strategy?

When a flag forms, as a trader, you must wait for a breakout either beyond the resistance level or below the support level, and you can enter a long position or a short position, respectively.

4. What is the flag pattern algorithm?

A flag pattern algorithm shows a consolidation phase of the price of a certain asset after a sharp movement of its price.