According to Thomas Bulkowski, one of the most profitable technical patterns is the high and tight flag, breaking higher. According to Bulkowski, when properly recognised, it can reach a target up to 90% of the time. So, here is what you need to look for to recognise them.
Recognising the flag pattern
Here are the steps to recognising the pattern:
- First of all, you need to witness a steep and sharp price trend (ideally over 90% gain).
- Ideally, this price move should be around 45 degrees.
- Then you need to see the price form a small channel that resembles a ‘flag’ pattern.
- The best performance comes from when the flag slopes away from the preceding trend.
- Flag formations should form over a few short days – ideally, less than 15 days.
- Use the measured rule to aim for your target. So, the height of the move preceding the ‘flag’ formation is the measured target from the breakout of the pattern.
- Use a trailing stop to lock in profits.
- The trade entry is simply the break of the pattern and stops can be placed on the other side of the pattern.
Here is a look at what the Flag pattern should look like:
The most likely reason the flag pattern works is that by definition you are already entering a trending market. That is a prerequisite for finding the pattern. This pushes the odds in your favour and, when combined with a trailing stop, you can see why some traders focus on trading the flag and pennant pattern in isolation.