In technical analysis two major groups of figures are distinguished: continuation patterns and reversal patterns. This article will focus on the first group - Continuation patterns.
As it is clear from the title, continuation patterns signalize about continuation of trends in the previous direction. The main patterns of this category are represented by the figures “Flag” and “Pennant”.
Flag is a good signal of continuation of a trend when sharp movement is changed to a short pause. There are three forming states of the flag: first a strong vertical movement takes place (flagpole is shown), then flag figure appears during calm down, whereupon strong movement continues in initial direction. Let's consider all three stages using the real example:
At 1 – 2 area the price showed good sharp upward movement, thereby forming flagpole. During calm down the price moves between A and B lines. Flag appears. Following to breaking B level in the point 3, a strong upward movement continued and formation of the figure can be considered as finished. It is assumed that after break up the size of movement will be similar to one when flagpole was formed. Purchase transaction is recommended to be made right after B level breaks up in the point 3.
Flag in the opposite direction is drawn the same way; all stages, levels and recommendations work the same, only are inverted.
Occasionally it happens on the market that already drawn flag figure is then transformed into "double top" figure, whereas the price moves the opposite instead of following the same tendency. To be safe during such movements and improve yield, it is recommended to use supplementary indicators.
Pennant is a particular type of the flag. The main difference is the form of banner:flag has rectangular banner whereas pennant has triangle banner. All stages of forming figures are the same: strong movement in 1 – 2 zone, pause when the price is between A and B, then break up and continuation of a strong movement in previous direction.
A more sophisticated insight on price, and as the result, forming more precise figures of continuation and reversal will come as you gain experience. Traders of any level are recommended to combine this trading method with other know how techniques from the toolbox of technical analysis.