Entry: after breaking the flag's upper border at point (4)
Take profit: identified by measuring the flag's pole height, which is the vertical distance between points (1) and (2), that measurement is then applied from the breakout rate (4)
Stop loss: the flag's lowest low (3)
BULLISH FLAG PRICE ACTION
This chart pattern starts forming with bulls already in control of the exchange rate's sharp uptrend. When bears enter the market, trading is contained briefly in a down-sloped range. Bulls then break that range's upper resistance, and the exchange rate continues its uptrend.
Let's break down the pattern formation!
A sharp upwards price action is initiated from (1) till it finds the first resistance (2), creating the flag's pole.
Price action reverses direction from the first resistance (2) and starts forming lower highs and lower lows in a narrow flag-like formation, till it finds the lowest support in that formation at point (3)
The pattern is completed when price action reverses direction from the lowest support (3) and goes upwards till it breaks the flag's upper border at point (4)
NOTES ON BULLISH FLAG
Direction
Continuation
Type
Bullish
Occurrence
High
Common term
Short-Medium
Before the breakout, at least two highs (including the flag's pole high) and two lows are the minimum for a valid pattern, more touches are acceptable.
The flag's pole is a sharp upwards price action.
Volume is usually high at the flag's pole, as well as when breaking the flag's upper border.
This pattern is commonly found on short-term and medium-term time frames.
BULLISH FLAG REWARD:RISK
This pattern is known for its high R:R.
R:R depends on how narrow the flag formation (2-3) is, compared to the flag's pole height (1-2)
Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to that rate.
