Forex Flag: Forex Chart pattern
The flag graphical price model is a minor, short-term, trend continuation pattern that shows the previous direction will prevail in the future after its formation. As for the daily chart the pattern is generally formed within a week.
This pattern is represented by two parallel trendlines, a support and resistance, holding the range between high and low prices within, visually forming a parallelogram or a flag and generally directed against the main trend. The pattern is often characterized by a sharp price entering after intensive movement.
Interpretation of Forex Flag
This pattern confirms the trend movement direction in case of breaking through:
- a sell signal arise if the pattern is formed in a downtrend and the price falls below the support line (plus certain deviation is possible);
- a buy signal arise if the pattern is formed in an uptrend and the price rises above the resistance line (plus certain deviation is possible).
Following a flag pattern formation the price is generally believed to change in the same direction it was going prior to the pattern by at least the same amount as the price change from the start of the trend to the formation of the flag. The target level is calculated as follows:
In case of a downtrend:
T = BP – (TS – PS)
In case of an uptrend:
T = BP + (PS – TS)
T – target price;
BP – breakthrough point;
TS – trend start point;
PS – pattern start point.