Flag pattern

A flag has two parts: the pole and the cloth. The pole is the sharp move, a run of large-bodied candles. The cloth is the quiet pause that follows, small candles drifting slightly against the move or sideways.

The message is that whoever made the move is still in charge. If price gives back only a little after a rally, sellers can't find the strength to push it lower. Buyers are either banking some profit and waiting, or hunting for a slightly cheaper entry.

A bull flag forms in an uptrend, a bear flag in a downtrend; each is the mirror of the other. When the pause narrows to a point like a tiny triangle, traders call it a pennant. Same logic: sharp move, short calm pause, then often continuation.

Start with the pole. You want long bodies and short wicks, price that actually travelled rather than drifted. No pole, no flag, just a choppy chart.

Then check the depth of the pullback. A healthy flag usually gives back less than half of the pole, often around a third. Candles shrink, bodies narrow, and the top and bottom of the cloth read like two roughly parallel lines. If you can see volume, expect it high on the pole and light in the cloth.

Confirmation is a close through the upper edge of the cloth. A wick poking out isn't enough; the candle has to close beyond the line. Some traders wait for that break, others buy near the bottom of the cloth where selling is fading. Earlier entry means a better price and less confirmation.

The logical stop sits a little below the cloth's low. If price gets there, the pullback is no longer shallow and your idea is wrong. With the low at 100 and your entry at 104, you're risking 4 points, and that distance is your 1R.

Calling every pullback a flag. A correction that hands back more than half the pole on big red candles isn't a rest, it's a fight. Sellers are back, and the pattern no longer deserves the name.

Buying the top of the pole. Jump in on the close of the biggest green candle and there's no structure to hide a stop behind; either it's miles away or the first calm dip takes you out. The whole point of a flag is that it hands you that structure. Wait for the cloth and the stop location becomes obvious.

Squeezing the stop just under the cloth's low, exactly where everyone else puts theirs. Obvious lows attract liquidity, and price will sometimes wick through them to collect stops before turning. A little extra room, with a smaller position to match, holds up better.

A flag is a continuation pattern, so if the trend behind it is exhausted there's nothing left to continue. The third or fourth flag in a long rally fails far more often than the first, because the pool of late buyers has dried up.

A cloth that drags on loses its edge too. If the pole took five candles and price has gone sideways for thirty, you're looking at a range, not a flag. Ranges have their own rules: trade the edges, wait in the middle.

Also check what the pole ran into. A flag sitting just under a major resistance meets sellers already waiting there, and even a breakout can stall at that level. Projecting the pole's length from the breakout is the textbook target, but nearby levels often cut it short.