The Flag Pattern Trading Strategy
The Flag is probably the most famous and used trading pattern till this day, mainly because of its simplicity and the nemours time you can identify it on the chart.
The Flag pattern is mainly known as a continuation pattern for trading momentum assets. However, it is important to understand that not all Flags are equal, and before you trade that pattern, you might want to get familiar with its important nuances of it.
This is 1 out of the 3 most accurate trading strategies, so make sure you watch the others as well.
Find The Right Asset
Only trade a flag on momentum as. It doesn’t matter if you trade stocks, futures or FX, in the end, a flag is a momentum-continuation pattern, and it means that if you currently don’t recognize momentum in the asset, it most likely will not work.
Be Aware Of Manipulation
The bull/bear flag pattern is a continuation of a trend. Therefore, when you’re looking for one, make sure you find it at the beginning/middle of the trend and not when the trend is too extended.
Many new traders are looking to trade flag patterns because of their simplicity, but since they are unaware of market makers’ manipulation, they fall into their trap.
False break trap
When you see a flag pattern formation at an extended trend, it should be your warning sign that market makers are trying to manipulate the price, making you believe it will continue higher so you will buy at the break of the pattern while they can sell you their shares at the top of the trend.
Shake out trap
This trap is a bit more sophisticated because the flag pattern will be at the right place (the beginning or middle range of the trend) on the right asset. Then, market makers will try to “shake” you out of your position to take your liquidity (the shares that you bought/are about to buy).
So how does it work: Image you found a perfect bull flag pattern that you would like to buy as soon as it breakthroughs the consolidation of the flag, and your stop loss is below the consolidation.
The market makers will wait for the flag to break through the consolidation for a few seconds and then sell/short aggressively of dropping down the price all the way to your(and other traders) stop loss. Then, while the price drops toward your stop loss, they will start buying (with a different trading account) all the sell orders of the traders who went Long (bought) because of the bull flag pattern.
When they’re done buying the needed shares, the price will push higher, break the flag pattern again, and most likely will continue the up trend.
So how can you react to this manipulation?
Before placing the buy order for the breakthrough of the flag, make sure you don’t see an unusual volume during the consolidation. An unusual volume will mostly indicate that something/someone is trying to create price manipulation that might be the “shake out” we just covered.
But what can you do if price breakthrough the flag you are now in, and you see that price is rapidly going to your stop loss.
If you realize that you’re in a shake-out (before shaken out), move your stop loss below 20 exponential moving average. That should give you enough room not to get your stop out.
If the market makers already took you out of your position, wait until the price holds the 20 exponential moving average, and go Long (buy) again above the first green candle.
If you do not feel confident, you can enter with 50% above the green candle and add 50% more when the price breaks the flag pattern again.
Watch The Flag Pattern Strategy
In this video, Michael talks about one of his favorite momentum trading strategies, called the flag pattern.
You will learn how to find the right asset to trade on, the reasons you must have to enter the trade, and the checklist for exiting a trade.
Flag Pattern conclusion
The most important element when trading any kind of strategy is to understand it completely and know all the “tricks” so it could work to your advantage.
You can not expect to win consistently in the market if you are trading a pattern just because you read in a book that it’s a good pattern to trade.
To become good at anything you do in life, you must learn the small nuances.
So remember the pattern general rules such as strong movement to the up/downside (The stick), consolidation (flag) on low volume, a momentum asset to trade on, and all the traps and tricks the market makers will create to get your liquidity.
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