Tutorial on Flags and Pennants and How To Identify Them.

Flag and Pennants are very common and reliable short term congestion patterns formed between trends. Flag/pennant are considered to be strong continuation pattern. Flag/pennant differs from each other in their shapes only, other than that they resembles each other so much in their characteristic that the names flag/pennant are used interchangeably. As the name suggest a flag is a rectangular in shape while a pennant is triangular in shape. Flag/pennant gives the buyer very good opportunity to enter the trending market as they represent very short pauses in trends.

Composition of Flags and Pennants

It consist of two parts:
1. Flag pole: It is the distance between the first support level to the high of the flag/pennant in case of bullish flag/pennant. For bearish flag/pennant it is the distance between the first resistance to the low of flag/pennant.

2. Body: In case of flag the body is a small rectangular pattern that slopes against the trend. The rectangle is formed by two parallel trend lines. For example if the trend was up then it the flag slopes down and vice verse.

In case of pennants the body is a small symmetrical triangle and its wide near the flagpole and tapering towards its end.

Types of Flags: Depending on the direction of trend they are of two types.

1. Bullish Flag: It is formed in an uptrend. It is a bullish signal confirming that the uptrend may continue further. It is a small pause, where the price is consolidated between the two parallel line forming a rectangle flag, before the pattern continues.

2. Bearish Flag: It is formed in an downtrend. It is a bearish signal confirming that the downtrend may continue further. It is a small pause, where the price is consolidated between the two parallel line forming a rectangle flag, before the pattern continues.

Types of Pennants:
It is also of two types depending on the direction of the trend.

1. Bullish Pennants: It is formed in an uptrend. It is a bullish signal confirming that the uptrend may continue further. It is a small pause, where the price is consolidated between the two tapering converging trend line forming a triangle pennant, before the pattern continues.

2. Bearish Pennants: It is formed in an downtrend. It is a bearish signal confirming that the downtrend may continue further. It is a small pause, where the price is consolidated between the two tapering converging trend line forming a triangle pennant, before the pattern continues.

Important Characteristics of Flag and Pennant

Flag/pennant pattern is considered reliable only when they have following characteristics:

1.Prior Trend: Flag/pennant is considered as a continuation pattern only, when there is prior trend before the formation of flag/pennant.

2.Duration: Flag/pennant are considered as a short term continuation pattern. Flag/pennant pattern last form 1 to 12 weeks however if the pattern is longer then the above mentioned period it is considered as rectangle or channel pattern in case of flag. And in case of pennant pattern more than 12 weeks is considered as symmetrical triangle and it will no longer follow pennant characteristic. Ideally formed flag/pennant pattern are 1-4 weeks old.

3.Breakout: It is very important for the confirmation of this pattern. A breakout is supported by huge volumes. Breakout is the confirmation of this pattern the previous trend has resumed.

4. volume: Volume play a key role in confirming a number of chart pattern same applies here also. As flag/pennant formation develops there is decrease in volume activity while there is increase in volume as the pattern gives breakout. Incorporating volume study with Flag/pennant further strengthen the reliability of this pattern.

5.Price Target: One can roughly place a price target after a breakout, and it should be the height of the flagpole, however other indicators have to considered as well like MACD, Relative Strength Indicator (RSI), etc.

Precautions Taken while considering Flags and Pennants

1.Study based on one technical indicators sometimes gives false signals and proved to be very dangerous. Therefore its always advisable to incorporate other technical study for reconfirmation.
2.Always use a stoploss, its the best strategy to maximize your profit and minimize losses.

Example of Flag Formed By State Bank Of India Ltd.

Example of Pennant Formed By CESC Ltd.