Trading 101: Identifying & Trading The Crypto Flag Pattern Like a Pro
It is impossible to overstate the value of chart pattern analysis for crypto traders. These patterns make up the basis of most traders’ decisions. Chart patterns often show a particular trend in price action and form the basis of technical analysis. Just like how the candlestick patterns are divided into trend continuation and reversal patterns, the crypto chart patterns have the same classification.
What is a Flag Pattern?
The crypto ‘Flag’ is a trend continuation chart pattern. It often forms after a short period of price consolidation preceded by a long-term trend – either bullish or bearish.
The most important feature of a Flag formation is the flagpole, which corresponds to a strong price movement. The Flag chart pattern represents a brief interruption of the trend before it continues, i.e., the price movement continues in the same direction. Identifying the flagpole is very crucial in a Flag formation. Look for strong and obvious price boosts with successive price sticks, price gaps, and strong volume, all pointing in the same direction.
The Flag pattern got its name because the price action of the pattern resembles a Flag on a flagpole. Flags are trend pullback patterns. This means that you take advantage of a momentary pause in the prevailing trend to jump on the trend. Typically, the volume should decrease as the Flag chart pattern forms and increases when the price breaks. The determination of the profit target differs in the Flag formation compared to the other chart patterns.
When trading the Flag pattern, we are less concerned with the exact shape of the flag, but with the following:
- The strength of the trend
- The feasibility of determining a breakout point
- The extent of the pullback regardless of whether it’s shallow or deep.
Bullish Flag Pattern
When a bullish Flag pattern appears, it signifies that the bullish trend will continue.
In this case, we need a sustained uptrend as a flagpole. The Flag consists of two parallel lines that are inclined downwards or descending; this represents a short-term price pullback – a consolidation region before the trend breaks out.
After identifying the bullish Flag pattern, you should prepare yourself to open a long position.
- Go long when a candlestick closes above the upper trendline of the bullish Flag. A breach of the upper trendline confirms the continuation of the bullish trend.
- If the price breaks through the upper trendline but closes below it, you can adjust the line to match the breakout while the pullback continues.
- It’s advisable to place the SL just below the lower trendline of the Flag.
- Keep in mind that the pullback forming the bullish Flag does not extend beyond the pole. This would mean that the price action is turning bearish.
Formation of Bullish Flag pattern on the Bitcoin Price Chart | Source: BTC/USDT
The price target is determined by the fact that distance (mast to the flag) is applied to the outbreak of the Flag. This means you should determine the distance (vertical) from the signal of the upward movement to the highest of the Flag and apply this distance, if necessary, vertically, to the breakout signal of the Flag.
Bearish Flag Pattern
The appearance of a bearish Flag signifies that the downtrend is in the consolidation phase and is about to break out and continue.
The flagpole is formed from the sustained downtrend, while the Flag forms when a slight price pullback appears. Ideally, the Flag forms when the price action trends within a channel that’s slightly tilted upwards. This is in contrast to the bullish flag, which is usually tilted downwards. In some circumstances, the Flag for both bullish and bearish could be horizontal.
The process of identifying the bear Flag is the exact opposite to that of the bullish one.
After identifying the bearish Flag pattern, you should prepare yourself to open a short position.
- Go short when a candlestick closes below the lower trendline of the Flag. A break below the lower trendline confirms the continuation of the bearish trend.
- If the price breaches the flag’s lower trendline but closes above it, you can adjust the line to match the breakout while the pullback continues.
- It’s advisable to place the SL just above the upper trendline of the flag.
- Keep in mind that the pullback forming the bearish Flag does not extend beyond the pole. This would mean that the price action is turning bullish.
Formation of Bearish Flag pattern on the Bitcoin Price Chart | Source: BTC/USDT
Here are some of the key points to remember about the Flag crypto pattern:
- The Flag is similar to an upward/downward trend in that it consists of two parallel lines.
- The formation appears in a trend as a very short consolidation and belongs as tertiary formations to the trend confirmation formations.
- The Flag should always be directed according to the current trend direction.
- The formation is called the bull Flag in an uptrend and bear Flag in a downtrend.
Also, just like when trading the crypto market with any chart pattern, it is advisable to use other reliable technical indicators to confirm the entry signal on your trading timeframe. Consider following the KuCoin blog for more interesting educational content. All the best!
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