Understanding Flag Patterns and How to Use Them On eToro Trades

If you’ve ventured into trading, you’ve likely encountered candlestick patterns. Candlestick patterns are price movement patterns in the form of candles that tell possible futures of a trend. As of this date, there are a lot of candlestick patterns used by traders to gain leverage on their trades. For this particular article, we’ll be discussing the more common kind of candlestick pattern which is commonly sought-after by many traders because of its high percentage (than other candlestick patterns) of predicting future price movements – this pattern is the flag pattern. So, what is a flag pattern and how can we implement it on actual trades on eToro?

(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings.  In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)

What is a Flag Pattern?

Technically speaking, a flag pattern is simply a price movement pattern that moves against the direction of an existing trend for a short period and then continuing with the existing trend. In other words, if the existing trend is an uptrend, the flag pattern will show up in a momentary downtrend movement and then goes back up for an uptrend movement. It is named as such because of its form which resembles a flag.

The flag pattern is made up of an upper trendline which connects the significant highs of a price movement at a certain range or period. It is also equipped with a lower trendline which is drawn by connecting the significant lows of a price movement at a specific period or range. Both the upper and lower trendlines are generally parallel with each other. However, one trendline can also be sloping provided that the angle is not too significant to the point that the trendlines intersect, else the pattern would be considered as a triangle pattern or wedge pattern.

This pattern is made up of two varieties – the bullish flag pattern and the bearish flag pattern.

Bullish Flag Pattern

The bullish flag candlestick pattern is a continuation pattern that happens during a momentary pause from a strong upward price movement. It consists of a pole that is represented by the strong upward movement of the price. The formation of the bullish flag pattern involves a channel that directs downward with both upper and lower trendlines parallel to each other.

Breakouts are expected to happen as soon as the price pierces or breaks through the upper trend line.

Below is an example of the bullish flag pattern for the asset – AAPL.

On this particular example for the bullish flag pattern, there are multiple formations. Each of the occurrences of the pattern happened after a strong bullish movement of the price. It is also noticeable that the price within the flag bounced and pulled back only within the channel or between the upper and lower trendlines.

It is also important to note that the price movement within the channel should have at least two new lower lows and new lower highs else the pattern will be disregarded as a flag pattern.

Bearish Flag Pattern

The bearish flag pattern on the other hand is the counterpart of the bullish flag pattern. This pattern occurs during a momentary pause from a strong downward movement of the price. Just like the bullish flag pattern, it also consists of a pole that represents the strong downward movement of the price. Its formation features a channel that is directed upward, showing a momentary upward trend. Likewise, the channel consists of an upper and lower trend line that parallel to each other.

For the case of bearish flag patterns, pullbacks are expected whenever the price breaks through the lower trend line.

Here below is an example of the bearish flag pattern from the asset – AMX

From the image above, there are multiple occurrences of a bearish flag from a strong bearish market. Notice the momentary trend reversal from a bearish trend to a bullish trend then eventually continuing to move further downward. Also, the price changes happened within the channel or between the upper and lower trend lines. Pullbacks occurred as soon as the price broke through the lower trend line.

Our Final Thoughts

The credibility and reliability of flag patterns are dependent mainly on the requirements or their components. It becomes an effective trading strategy if one understands the conditions as well as the effect of the pattern. However, before a trader becomes an expert on this pattern, he or she still needs to understand the basic concepts that revolve around it. These basic concepts include the use of trend lines, identifying trends, drawing channels, and being able to find a strong price movement where the pattern may occur. While these things may seem intimidating for the newbie or someone who is just getting started at trading, it is doable provided there is constant practice and training on real-time trades. In this regard, eToro offers a virtual account where a trader can trade in real-time without having to spend anything. Having access to a virtual portfolio also grants access to all tools within the platform.

The best way to master flag patterns is to fully understand the basic concepts and to have constant practice.

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