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Flags and Pennants, Trading Continuation Patterns

After a sharp move, price often pauses in a small consolidation before continuing. Flags and pennants capture these pauses and offer continuation setups with relatively tight risk. Flag: a small rectangle or parallel channel sloping against the prior move.
Pennant: a small symmetrical triangle after the sharp move.

The sharp move before the pattern is called the flagpole.

How to trade them:

1. Identify a strong, impulsive move (the pole).
2. Wait for price to consolidate in a narrow, orderly pattern, with candles that are smaller than those of the pole.
3. Mark the boundaries of the consolidation.
4. Wait for a close beyond the boundary in the direction of the pole.
5. Enter on the break or the retest.
6. Place the stop on the other side of the pattern.
7. Target a distance equal to the pole, or the next key level.

Quality checks:

- The consolidation should be brief and tidy
- The pattern should align with the higher-timeframe trend
- The risk-to-reward should be at least 1:2

Warnings:

- If the consolidation lasts too long or retraces deeply, the pattern weakens
- Breakouts can fail, especially into major levels

Think of flags as a brief rest during a run. Don't chase the pole, and wait for the pause.

Practice finding ten flags on your charts and record how many continued versus failed.

Flags after data releases are worth a separate note, because they are common and they behave a bit differently. The pole is the release candle, the flag forms in the 15 to 45 minutes afterwards, and the break often comes when the second wave of positioning arrives, or when US cash equities open.

The measured move is where I'm cautious. A pole printed in the first minute after CPI includes a liquidity gap, so projecting its full length from the breakout tends to overshoot. I take partials at the next level and treat the pole target as optimistic.

The other check I'd add to your quality list is what else is on the calendar. A flag forming at 13:50 London time with a second release due at 15:00 is not the same setup as one forming on an empty afternoon, because the pattern can be overwritten by the next number before it ever resolves.

Flags and pennants work well in strong trends. A rule that improves them: the consolidation should retrace less than about half of the pole. A deeper retracement weakens the continuation case, and often turns into a reversal.

Also, the volume (or tick volume) typically declines during the consolidation. That's a weaker signal in spot forex, where only tick volume is available, but still useful as confirmation.

Brief and tidy is the part I had to turn into numbers, because every flag looks tidy once you know it broke. Mine are a retrace under half of the pole, as FXS Prop Desk says, and a duration of no more than three times the bars the pole took.

So a pole of four M5 bars gets twelve bars of flag. Past that I stop treating it as a pause and start treating it as a range, with the range rules instead.

The other choice that changes results is where the pole starts. Measuring from the swing low gives a longer pole than measuring from the first large candle, and on a typical 40 pip EURUSD pole the two can differ by 10 pips or more, which moves the target by the same amount.

I use the first large candle, which keeps targets shorter. It does not fix the overshoot LondonNewsTrader describes after releases, because the liquidity gap sits inside that first candle, so on release poles I still take the partial at the next level.

For the practice task, I would record the failures by type. Mine split into flags that broke the wrong way and flags that broke the right way and stalled at the next level. The fixes for the two are different.