The chart pattern that we will learn in this section depicts something very similar to a ‘Flag’ in the price chart. Let us see how?
What are flags in Technical Analysis?
The flag pattern is a continuation pattern that is formed when there is a sharp movement in the prices that is followed by sideways sharp price movement. This pattern is completed when there is another sharp price movement in the same direction as the move which started the trend. This pattern generally lasts from one to three weeks.
How to interpret this pattern?
Flag patterns are formed in the shape of a parallelogram or a rectangle after the consolidation. When the prices of the stock move in a particular direction but suddenly an opposite trend starts to take place for a short duration then it becomes a flat pattern. As an opposite trend is formed for a short duration and the earlier trend is going to come back, this pattern should be viewed as the profit booking opportunity.
Below is the example of Flag formed in the daily chart of GMM Pfaudler Ltd.:
Price target and Stop-loss:
The stop loss can be set just outside the flag on the opposite end of the breakout. The profit target is measured as the distance between the two parallel lines.
Traders should also check the overall market trends in order to maximize the success of this flag chart pattern.