Flag Pattern Strategy For Forex Traders

If you are looking for a simple Forex trading strategy with high-profit potential, then you have come to the right place.

Flag patterns are straightforward to trade and offer a great risk to reward ratio, but what does this market phenomenon consist of?

The pattern is made up of 3 parts:

  1. An initial trend move in either direction, which forms the flagpole.
  2. Market consolidation after the initial move which forms the flag.
  3. Breakout from the consolidation and continuation of the original trend.

 

Bullish flag

Bearish flag

Why does the flag pattern work?

I’m sure you have heard the phrase “the trend is your friend” many times over. Experienced traders repeat this so often because this is the path of least resistance i.e. it is easier to trade with the trend.

Trading the flag pattern means flowing in the market’s current direction. So instead of just guessing where price will go, you wait for the market to show its hand and then wait for an opportunity to join it.

Your chance comes when price takes a pause and then breaks out of the consolidation. Now you can join the trend without chasing after it.

No more chitter-chatter. The strategy is up next.

Side note – If you want to have a deeper understanding of flags, then check out How To Trade Flag Patterns, which describes the theory in more detail.

Flag pattern strategy

Entry

  1. Market must make a significant bullish or bearish move.
  2. After the initial move, wait for price to consolidate in a small range or channel.
  3. Enter if a candlestick closes past the consolidation zone (breakout) in the direction of the trend.

 

Buy trade entry

Sell trade entry

Exit

  1. Place the stop loss (SL) past the breakout level – In a buy trade, this would be below the consolidation’s resistance level. In a sell trade, this would be above the consolidation’s support level.
  2. To calculate the take profit (TP) – Use the distance from the trends previous two swing points, and set the TP a similar amount away from the breakout level.
  3. Trail your SL if the market makes swing highs or swing lows in your favour.

 

Buy trade exit

Sell trade exit

Conclusion

Make sure that you are always in line with the prevailing trend, otherwise you cannot make a profit trading flag patterns.

Furthermore, you should test and adjust this trading strategy further to gain an edge over the market. But remember to always keep your approach as simple as possible.

Open an account with AvaTrade to try this strategy out for yourself. Otherwise, backtest it first on MetaTrader or TradingView.

Fly your flag.

Trading Flag Patterns FAQ

  1. An initial trend move in either direction, which forms the flagpole.
  2. Market consolidation after the initial move, which forms the flag.
  3. Breakout from the consolidation and continuation of the original trend.

Flag patterns are a fantastic approach because the market is already in a trend, and the consolidation before entry offers an excellent risk to reward.

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Guy Seynaeve

Guy Seynaeve

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