How to Trade Bullish Flag Patterns in Forex

how to trade bullish flag patterns in forexTechnical traders of all financial instruments like to identify recurring chart patterns that they feel will enhance the probability that they can correctly forecast the direction prices will take in the future. This belief that price patterns on a chart will repeat for any given time frame is what lies at the heart of technical analysis.

Forex traders definitely look for price patterns having such names as 1-2-3 Top or Bottom, Head and Shoulders Top or Bottom, Bear or Bull Flag, Double or Triple Top and Bottom and others that fall into three main classifications as far as whether they indicate whether prices will continue in their current direction, reverse their direction, or form a pattern where they could go either way.

Chart patterns that indicate that prices will maintain their current trend are called continuation patterns. Patterns that forecast a significant change in direction are called reversal patterns and patterns that account for prices to go either way are called bilateral. One of these, the Bullish Flag pattern and how to trade it in forex will be the focus of this discussion. This pattern is classified as a continuation pattern. Here is how to recognize the pattern and how to trade it.

The bullish part of the name simply signifies that currency pair prices are rising. For example a bullish trend in the EUR/USD would mean that the euro is gaining value compared to the dollar. For the pattern to form, the first thing required is a rapid vertical or nearly vertical increase in prices to form the pole of the flag. Ideally, one dramatic, large increase over the period of one bar or candle would form the pole, but in most real-world scenarios it may be permitted to consider three or four bars or candles.

Once the pole has formed, the next price move will be down, but by no more than 1/3 of the distance from the top of the pole to the bottom of the move downward. Prices then reverse back upward, but do not go beyond the top of the bars that form the flag pole. Several or more subsequent price bars can neither rise above the top of the pole nor fall below the first bar that retraced downward to form the first bar of the flag.

Here are some ways to trade this pattern.

1. Since it is classified as a bullish continuation pattern, the assumption is that eventually, prices will break above the top of the flag and then resume their upward trend. The trade can be initiated by placing buy limit orders above the resistance which represents the top of the flag, or entry can wait until resistance is actually broken and a buy market order is placed.

2. A buy limit order can be placed at the support level at the bottom of the flag, or when the bottom of the flag is touched a market buy order can be submitted.

3. A contrarian approach to trading this pattern involves placing sell limit or market orders at the top of the flag, then flipping those orders when prices retrace to the bottom of the flag.

Remember, what constitutes the flag pole and the flag can be a little arbitrary. The pattern is seldom perfect in its resemblance to a flag. Also, this pattern is not very common over short time frames for the major currencies. The USD/JPY will form some nice flag poles, but the flags may go on forming seemingly forever. Contact LucrorFx today for consultation on your Forex investment.

 

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