Trading momentum pattern 🤯

Learn the tricks of trading flag & pole pattern

Today in less than 10 minutes:

1. What is Flag and Pole pattern

2. How to trade Flag and Pole pattern

3. Examples

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When the price of a stock is strong and trending, it usually takes a small pullback. This is usually the market participants booking the profits. At times, if the momentum is really strong, this can prove as an opportunity for the participants to trade the stock again. On candlestick charts, this price behavior is spotted using the Flag and Pole pattern. This is a logical pattern that shows momentum and the eventual breakout.

In this newsletter we will understand the logic behind this pattern, how to spot this pattern, how we can build a trade setup around this pattern and look at some of the examples.

The Concept

Let us first understand the reason for the flag and pole pattern forming. As per the Dow theory, when the price breaks out from accumulation or distribution phase, it enters into a mark-up or a mark-down phase respectively. This mark-up or mark-down phase is characterized by momentum in the price. This momentum attracts participants that fuel it further. When the momentum is strong and trending, the weak hands start squaring off the positions. This causes a pullback in the price.

The above price behavior is shown by the flag and pole pattern. A flag and pole pattern refers to a market trend where prices fluctuate within a narrow range (the flag) after a sharp rise or fall (the pole). It often signals a continuation of the prior trend when the price breaks out of the flag pattern.

For a bullish flag, the uptrend is followed by a correction, usually between two down slopping trendlines. This correction is short lived, often for a few candles and it is followed by a bullish breakout above upper trend line of the pattern. This pattern is formed in the mark-up phase as part of Dow Theory.

For a bearish flag, after the downtrend, price corrects and remains with the upsloping trendlines followed by a bearish breakout. It is a strong bearish continuation pattern. The bearish flag breakout can result in a steep decline. This pattern forms in the mark-down phase as part of Dow Theory.

To spot these patterns, the traders can create a list of stocks that have currently given a breakout from accumulation or distribution phase and watch the stocks.

Bullish Flag and Pole pattern forming on JMFINANCIAL (Daily)

Bullish Flag and Pole pattern forming on Nifty 50 (Daily)

Building effectiveness while trading Flag & Pole Pattern

This pattern should be traded in the direction of the trend. Bullish Flag and Pole will be traded in the bullish trend and bearish Flag and Pole will be traded in the bearish trend. Super Trend indicator can act as a great trend filter. Price trading above the Super Trend can be considered to be in a bullish trend and price trading below the Super Trend can be considered to be in a bearish trend.

To maximize the effectiveness of the Flag and Pole pattern:

  1. Use SuperTrend with default settings: Period = 10 and Multiplier = 3.

  2. For bullish moves, look for a flat but bullish SuperTrend during the Flag formation and for bearish moves, look for a flat bearish SuperTrend during a Flag formation.

  3. Trade the breakout of the flag with SuperTrend as your stop-loss strategy.

  4. As trade starts to move in your favor follow SuperTrend for trailing stop-loss

If the trader wants to exit with a target rather than trailing the stop loss, they can use the length of the pole as the target after the breakout.

It can be an added bonus if the stock is outperforming or underperforming the broader market during the breakout.

Flag and Pole pattern forming on BAJAJ AUTO (Daily)

This pattern works for all the timeframes, intraday (15 min timeframe) and swing trading (1 day timeframe), and positional (1 week timeframe).

Flag and Pole pattern forming on ABFRL (15 minute)