Session 7 - Flag Patterns

In Bounce (https://www.unofficed.com/bounce/), We have divided The Market into broadly three trends - Uptrend, Downtrend, Sideways Trend.

The Flag Pattern is formed when the market consolidates ( read, Sideways Trend ) in a narrow range after a sharp move ( read, Uptrend or Downtrend ).

It gives us the opportunity to enter the market in the middle of a trend.

Example:

In this chart, ICICI Bank is rising upside. We can label it as an Uptrend with respect to the “D” Timeframe https://www.tradingview.com/x/qWfUZmvw/

Swing Chart - https://www.tradingview.com/x/24AIfklF/

Price Action based Channel Chart - https://www.tradingview.com/x/zY3IgRNj/

If We shift the timeframe to higher, it will be more clear - https://www.tradingview.com/x/xFB2sPkQ/

Right now, What You’re seeing is a pure uptrend with no serious consolidation. Now, The Flag Pattern will occur when the price pauses and starts moving in a range.

https://in.tradingview.com/i/FVvmhK4O/

Here is an example of the Classic Flag Pattern that occurred in Adani Ent a few days back. https://in.tradingview.com/i/lFYKx5b2/

As you can see in the SBI Chart above, The Flag Pattern can also form after a downtrend too. We never told if the Flag can not be inverted.

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If a flag is formed after an uptrend; it will have a tendency to move downside. So, the Flag will (read, should often) move opposite direction to the original trend.

https://www.tradingview.com/x/ommCfsEj/

In this chart of AuroPharma, You can see it has retraced almost 61.8% in this Flag Setup.

Now, Our core assumption is - It will eventually give a breakout (or, breakdown) and will continue the trend. So, in short, a Flag Pattern is a trend continuation pattern that allows you to catch a trend in the middle!

https://www.tradingview.com/x/0DyTJ4SF/

If We revisit the recent amazing Uptrend of Wipro, You can see there are three clear Flag Formations in the W timeframe.

What we should note here is - The first flag kept going upside. The second flag retraced. The third flag made a converging pattern.

In the end, it kept continuing the trend! If we summarize using Bounce theory, the flag is basically giving more structural formations of Higher Highs and Higher Lows.

Now, As we have three types of trends. We have two types of Flag Patterns.

  1. Bullish Flag Pattern
  2. Bearish Flag Pattern

Anyways, Traders combine this pattern with various other forms of technical and fundamental analysis! We will plunge into case studies more later on.

Bullish Flag Pattern

bullish-flag-pattern_body_2019_10_28_10_31_00_John_J_Murphy_Technical_Analysis_Of_The_Financial_Marketspdf0 (1)

Bearish Flag Pattern

bearish-flag-pattern_body_bearflagpattern (1)

Auropharma broke out just after in the next trading day after our discussion.

https://www.tradingview.com/x/1t03kZmc/

But -

How I chose Auropharma all of sudden?
And, Was it pure luck? This breakout was quite a momentum.

It is a Classic Example of Bull Flag Pattern.

Remember this line - Now, Our core assumption is - It will eventually give a breakout (or, breakdown) and will continue the trend.

Here is another example but this time it is classic bear flag.

https://www.tradingview.com/x/acY9VYXw

Bullish Flag Pattern

In this chart, As You can see Bajaj Finance follows a 50% retracement after a strong uptrend.

It consolidates within a rectangular range which is sloped downwards.

This is an example of a Classic Bull Flag Pattern.

Here is another example of ITC but with a smaller timeframe and again, with 50% retracement.

In this case, We can study multiple Flags within one single chart.

So, after making a range, it is expected to break out of that range continuing the uptrend.

This is why it is called a continuation pattern. The Classic Bull Flag Pattern is giving us the opportunity to enter the uptrend in the middle of the trend occurrence.

Bearish Flag Pattern

Similarly, In the Classic Bearish Flag Pattern, exactly the opposite thing happens!

It consolidates within a rectangular range which is sloped upwards.

Strangely, in this ETHUSDT chart, We can see it has done 50% retracement before breaking the range and continuing the downtrend.