Looking for an easy way to confirm is a currency’s trend is going to continue? Here’s how to use a flag formation

Julie Brownlee, Fsp Invest, 25 Sep. 2014

Tags: flag formation, trend continuation pattern, bearish signal, bullish signal, forex trading, short forex trade, bullish flag, bearish flag

When the price of a currency starts moving about after being in a defined trend, it can be hard to know where it’s heading.

This is where trend continuation patterns come in. If you spot one of these, it could just be a matter of time before the currency resumes its trend.

One of these patterns is a flag formation.

Let’s take a closer look at how a flag formation works and how you can use it in your forex trading…

What is a flag formation?

A flag formation is a trend continuation pattern. A flag formation has a period of consolidation over a short period.

After this, the currency breaks out in the same direction it was trending before this consolidation period.

You can use flag formations to help you identify if a trend is just consolidating rather than reversing. Having this information can help to reduce the chance of you making the wrong trade.

With flag formations, you see a brief period of consolidation. This occurs in a solid and steep downward or upward trend.

The consolidation occurs within lines of support and resistance. These lines are usually parallel to each other, or slightly converging. This is what gives this formation an appearance of a flag.

There are two main flag shapes:

  • It’s slopes in the opposite direction of the original trend; or
  • It’s flat.

Have a look at the chart below of a bearish flag formation…

Chart of a bearish flag formation

The above charts show you the original trend was downwards (bearish).

The key points of a flag formation

You can measure the flagpole between A and B. The period of consolidation occurs between B and E. And you can see the resistance line running from C to D.

If you see an upward trend, then the formation is a bullish flag.

Once the currency’s price breaks through the support line at E, the trend continues its downward trend.

It’s at this point you’d put a short trade on. You would make your price target the same as the flagpole’s length (from A to B) from E.

The second chart shows you the example in actual currency movements. The height of the flagpole is 2,000 pips (140.00-120.00). So your price target would be 105.00 (2,000 pips from 125.00).

So there you have it, how to use a flag formation as an easy way to confirm if a currency’s trend is going to continue.

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