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Measure a Flag and Project Its Target

A strong impulse takes GBP/USD from 1.2500 to 1.2600, a 100-pip pole in three candles. Price then drifts sideways and slightly down in a small channel. The flag's high is 1.2585 and its low is 1.2565.

Step one, the quality check. The flag retraced from 1.2600 down to 1.2565, which is 35 pips, or 35 percent of the pole. That is shallow, which fits a healthy continuation. A flag retracing 70 percent would look more like a reversal.

Step two, the trigger. A close above the flag high at 1.2585 completes the pattern. Enter on a buy stop at 1.2586.

Step three, the stop. Below the flag low with a 3-pip buffer: 1.2562. Risk is 24 pips.

Step four, the target. Project the pole length from the breakout: 1.2585 plus 100 pips is 1.2685. Reward from entry is 99 pips.

Ratio: 99 divided by 24, about 4.1.

Now reality. Targets from measured moves are estimates, and many flags stop short. If you take half the position off at the pole's halfway point, 1.2635, and trail the rest, you bank 49 pips on that half, a ratio near 2 on it alone.

The ratio looks excellent because the stop is tight. The catch is that tight stops in thin conditions get hit by noise, so check the spread and the time of day before relying on it.

Exercise: find three flags in history and compare actual outcomes with the pole-length projection.

A clear way to measure flags. The 35 percent retracement is a good quality check. In my experience, flags work best when the pole forms during a high activity session, like London or the Tokyo open. Flags that form during quiet periods often fail.