Patterns in Charts – Flags and Pennants
Unlike the double top or bottom, flags and pennants are a chart pattern that tell you the direction the stock was heading is going to still be the direction the stock will be heading.
- Both patterns start with a strong volume move. This creates the flagpole. If it’s not on higher than average volume than it lowers your chances the pattern will hold true.
- Flags form when a short term change of direction occurs on lower volume. The highs and lows of the new price channel run parallel to each other.
- Pennants form when the prices gets locked on low volume with the lows getting higher and the highs getting lower until the two meet.
- The price then breaks out on volume again usually with a similar slope to the flagpole.
The psychology is after a big move some people will begin to take profits. As the true price gets settled out without any real price action the volume slowly dies. After the volume dies and the price hasn’t fallen hard a new confidence in the original direction is born and the interest moves the low volume stock more easily and the momentum brings in more interest.
Remember to verify your chart pattern against some other indicator that isn’t related to the pattern you are looking at. When non correlated indications align you improve your odds of a succesful trade.
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- Patterns on a Chart
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