The Flag/Pennant pattern is given this name for the shape that forms from the moves that the price makes on that particular stock. The look resembles a flag or pennant shape, and when this pattern is present, it indicates a nice price move about to take place.
How to Recognize the Flag/Pennant Pattern
Generally, the thing to look for most is a sharp move with either a heavy rise in volume (in the case of the price’s initial forming of the flag/pennant) and a heavy decline in volume (in the case of the price working to complete the look of the flag/pennant). When the volume follows suit, it is a strong indication that this pattern will continue to form, giving you the validation you need to secure your confidence in the possibility of a big price move taking place shortly after this pattern finishes forming.
It’s important to note that you should be able to draw a flagpole on this pattern as well to indicate its true formation of the flag/pennant. The flagpole is drawn at the point where the price rising above and breaks a resistance or support level.
To spot the making of this pattern, you must draw trend lines. At the top, draw a straight line connecting the price highs, and then at the bottom, draw a straight line connecting the price lows. In doing so, if this were the true making of the Flag/Pennant pattern, the lines that were drawn would create the image of a flag or pennant.
In the case of the “Pennant Style” pattern, the trend lines will appear in the shape of a triangle. More specifically, the look will resemble a scalene triangle, having no equal sides or equal angles.
In the case of the “Flag Style” pattern, the trend lines will essentially be parallel lines. More specifically, it would create the look of a curved-style rectangular shape. It will never appear as a box shape, for the simple reason that to do so would not be creating the perfect price changes to indicate a big price move in the near future when the pattern finishes. A box shape would be an indication of a Double Top or Double Bottom, which is a different chart pattern entirely, with its own set of rules.
When Do I Buy In and When Do I Sell?
Buy calls when you see the price move above your trend lines, indicating it has started its breakout. In most instances, the price move will last about as long as the flagpole took to form. Therefore, your best indication of when the price will finish its move is to draw another line of the same length of the flagpole and then draw a straight line from left to right at the top, to show where the price will likely bounce and reverse to a downward motion. When the price stops here and begins to move down, sell your calls.
Disclaimer: This information and advice is meant to be used as a learning tool for your own personal use. Trade at your own risk. Associated Content and its affiliates will not be held responsible for any losses you may occur.
Author’s Personal Experience