Whenever a layman hears about trading stocks the first thing that pops to mind is a bunch of charts. For a good reason. Charts are incredibly important to anyone who uses technical analysis to trade. And, in order to be a successful trader, you will have to learn to analyze them. Right now, we will speak about the flags and pennants patterns.
The Flag and Pennant
These patterns are a couple of continuation patterns that are very similar. The only real difference is in their shape during the consolidation period of the pattern. In fact, they are so similar that the terms can, and often will, be used interchangeably. Basically, a flag represents the period with a rectangular shape, while the pennant resembles a triangle. They are formed when a sharp upward movement is followed by a flatter, sideways one, that movement would either be the flag or the pennant. The pattern completes itself once the price breakouts and continues its rise. The entire movement of this pattern, that is the complete rise of the value is the flagpole for the flag/pennant.
The Flag Pattern
As we now know, the flag pattern is a pattern that will resemble a rectangle. In essence, the stock will go up and down, but hitting the resistance and support lines each time. For the flag pattern, these two lines will be parallel. The asset will not go over the resistance line or under the support line during the flag. As a rule of thumb, this is not a perfect flatline of the value. There is usually a slight movement that is opposite of the original movement. So, if the prices were going up, the flag will go slightly down. Once the breakout happens, the trade signal forms. The heavier the volume of the breakout is, the better the signal you get to confirm the pattern.
The Pennant Pattern
Unlike the flag, the pennant will usually create a pattern that is more akin to a triangle. Meaning that the trendlines for the borders of resistance and support will get closer. What happens is that the resistance line and the support line will both move towards the middle. And it is usually very symmetrical. This means that, unlike the flag, the pennant will usually remain horizontal. The rest would remain similar to the flag pattern.
4. The General Notions
In general, these two patterns are similar. There should be a sharp movement (either upwards or downwards. For the sake of the article, we were mostly writing about upward movements) followed by a pause.The main difference is that the construct the pause will create on the chart is different in shape. The most important factor is that the movement preceding the pattern is sharp and powerful.
Usually, this type of a pattern will form faster during downward trends and take more time in uptrends. Also, as a rule of thumb, you can expect one to last up to three weeks. Just bear in mind that they can be formed over longer periods too.
As the breakout signal is an incredibly important factor of these patterns you will need a stronger volume to confirm it. Once the breakout happens you will need to evaluate the price objective. The initial one is calculated by adding the prior move’s distance to the point of the breakout. So, for an example, let’s say you have a prior movement of 10 dollars. Once the breakout happens, simply add the amount ($10) to the value the asset had at the moment of the breakout.