http://www.dailyfx.com/forex/education/trading_tips/trend_of_the_day/2012/02/21/How_to_Trade_Bullish_Flag_Patterns.htmlFOREX: How to Trade Bullish Flag Patterns

By Jeremy Wagner, Head Forex Trading Instructor 21 February 2012 19:20 GMT

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There are many different patterns that traders follow to help time entries and exits. The flag pattern is one that tends to catch my interest when I find it because they can provide explosive moves. The AUDCAD appears to be in the middle of a potential bull flag pattern. Today, we will look at how to identify higher probability trading opportunities off the bull flag pattern.

The flag pattern is fairly simple with just three components.

1. The flag pole

2. The flag

3. A strong up trend

First identify an instrument in a strong up trend (flag pole). Through the duration of this uptrend, eventually prices need to rest and consolidate those gains. This price consolidation becomes the flag of the pattern. The flag portion of the pattern tends to be a gently downward sloping price channel. Additionally, this consolidation will retrace a small portion of the previous up trend. If the retracement becomes deeper than 50%, it may not be a flag pattern. Ideally, well see the retracement be less than 38%. Since this is a continuation pattern, we look for prices to break higher with a length equal to the size of the flag pole.

(Created using FXCMs Marketscope 2.0 charts)

For the past 3 months, traders have been buying risk through commodities, the stock market, and risk based currencies. As a result, the Australian Dollar has performed well against most other currencies because it offers a higher interest rate of return. So we have a fundamental back drop for additional strength in the Australian Dollar. Today, we will match the AUD against the Canadian Dollar.

The AUD/CAD is no stranger to the flag pattern. Back in October 2011, we saw this pair form and complete a flag pattern as the Australian Dollar pushed higher in conjunction with the stock market bouncing higher.

(Created using FXCMs Marketscope 2.0 charts)

Here is a picture of the completed pattern. The previous uptrend (flag pole) is noted in green. Prices consolidated in a gently down ward sloping price channel. This channel retraced only 38% of the previous up move. To trade the flag, you can time an entry at the lower end of the price channel or wait for a break up above the upper channel. Look to take profits by projecting the length of the flag pole at the bottom of the flag (orange dotted line).

(Created using FXCMs Marketscope 2.0 charts)

If we fast forward to today, the AUD/CAD continues its march higher. Prices are currently consolidating sideways in a gently down ward sloping price channel. Therefore, we have an opportunity to enter into a trade with at least a 1:2 risk to reward ratio.

Look for an entry near the bottom of the black price channel as support to go long. Place a stop loss just below the swing low. So that means an entry near 1.0637 with a stop near 1.0590. Once prices reach the top of the black channel, look to move the stop loss to break even. If this pattern holds up, the AUD/CAD cross rate could move to 1.10.

How to Trade Symmetrical Triangles

By Walker England, Forex Trading Instructor 20 September 2011 11:19 GMT

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Identifying symmetrical triangle patterns can become an asset to a trader in any market. To take advantage of the pattern, first we must be able to identify it. A symmetrical triangle is simply defined as a technical pattern forming a triangle from a descending resistance line and an ascending line of support. These lines of support and resistance can be found by connecting the wicks of candles on your chart. On the EUR/USD two hour charts below, resistance is defined by connecting the September 6th high at 1.4285 with the September 15th high of 1.3936. Support is derived by connecting the September 11th low at 1.3494 and the September 19th low of 1.3585.

(Created using FXCMs Marketscope 2.0 charts)

Once a symmetrical triangle is found, our two trading options become clear. The first is to trade price, as it continues to range, inside of the triangle. In our example we would look for the EUR/USD to advance towards our resistance line currently residing near the 1.3800 price handle. Limits should be placed at support near 1.3600. Stops should be placed above our resistance line at 1.3850, creating a favorable risk reward ratio.

(Created using FXCMs Marketscope 2.0 charts)

Option two for trading, is to wait for the EUR/USD symmetrical triangle to break. A breakout occurs when price would breach our support and resistance lines created with our connected highs and lows. Entrys to BUY should be placed above resistance at 1.3850 and Entrys to SELL below support at 1.3550. Stops should be placed between current support and resistance at 1.3700, with limits looking for new highs and lows for a minimum 1:2 risk reward ratio. Regardless of your opinion, understanding symmetrical triangles can assist us in our trading decisions. Identifying support and resistance is the key. Once these levels are found we are free to implement the strategy of our choosing by setting our entrys, stops and limit orders appropriately. For additional research on technical analysis, I would suggest the following resources.

In our last lesson we learned about the flag and pennant chart patterns, how to identify them on a chart, and when the pattern is a bullish or bearish sign. In this lesson we are going to learn how to identify entry and exit points for potential trades after spotting these patterns on a chart.

As we learned in our last lesson when you spot a flag pattern in an uptrend this is a bullish sign as the market consolidation which forms the flag is seen as a pause before a resumption of the original uptrend. As this is the case when traders spot these patterns on a chart they will commonly look to enter a buy position. The entry point which they will commonly use to enter the long position is the breakpoint of the upper line of the flag which is resistance. The target for the trade is then calculated by measuring the distance between the start of the up move and the highest point on the flag and then projecting that upwards. The stop is then placed just below the bottom support line of the flag.

Example of the Bull Flag Trading Strategy:

The strategy is exactly the same for the bull pennant, with one exception. When trading the bull pennant the stop loss is placed just below the bottom trend line, in line with the closest trough.

Example of the Bull Pennant Trading Strategy:

When you spot a flag pattern in a downtrend it is a bearish sign as the market consolidation which forms the pattern is seen as a pause before a continuation of the original downtrend. As this is the case when traders spot this pattern on a chart they will commonly look to enter a short position. The entry point that is normally used when trading this strategy is to sell on a break below the bottom support line. The target is then calculated by measuring the distance between the start of the down move and the lowest point on the flag and then projecting that downwards. The stop is then placed just above the upper resistance line of the flag.

Example of the Bear Flag Trading Strategy:

The strategy is exactly the same for a bear pennant, with one exception. When trading the bear pennant the stop loss is placed just above the upper trend line, in line with the closest peak.

Example of the Bear Pennant Trading Strategy:

So that completes this lesson. You should now have a good understanding of the strategies used to trade flag and pennant patterns as well as how to identify these patterns on a chart. In our next lesson we are going to look at the triangle chart pattern and how to spot this on a chart so we can look at ways to trade that continuation pattern. So we hope to see you in that lesson.

For more information on this pattern, read Encyclopedia of Chart Patterns, Second Edition

INCLUDEPICTURE "http://www.assoc-amazon.com/e/ir?t=bulkowskschar-20&l=as2&o=1&a=0471668265" \* MERGEFORMATINET , pictured on the right, pages 335 to 349. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.

Flags appear as small rectangles usually tilted against the prevailing price trend and mounted at the end of a flagpole. If you don't have a straight-line price run (the flagpole), then you don't have a flag. The best performing flags have a long, near vertical flagpole.

Important ResultsIdentification GuidelinesTrading TipsExampleSee Also

Two Ideal Flag Patterns

Important Bull Market Results* for Flags

Overall performance rank for breakouts: Not applicable

Break even failure rate for up/down breakouts: 4%; 2%

Average rise/decline: 23%; 16%

Throwback/pullback rate: 43%; 46%

Percentage meeting price target for up/down breakouts: 64%; 47%

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

* The performance results for flags are based on the short-term price swing, not the change from the breakout to the ultimate high or low as in most other chart patterns.

Flag Identification Guidelines

CharacteristicDiscussion

Price trendCan be any direction leading to the chart pattern.

ShapeLooks like a small rectangle often tilted against the prevailing price trend.

Trend linesPrices move between two parallel, or near parallel, trendlines.

3 weeksFlags are short, less than 3 weeks long. Patterns longer than that are rectangles or channels.

FlagpoleThe flagpole which leads to the flag should be unusually steep and last several days.

Volume trendDownward trend 71% of the time.

BreakoutUpward 54% of the time.

Flag Trading Tips

Trading TacticExplanation

Measure ruleCompute the height from the start of the price swing (point A in the measure rule figure to the right) to the end of the price swing (B) and then multiply it by the above percentage meeting price target. Add it (upward breakouts) to the bottom of the flag (C) or subtract it (downward breakouts) from the top of the flag (C) to get the target (D).

Half staffThe average move from the trend start to the top of the flag is 22% in 15 days. The move from the flag low to the trend end is 23% and takes 19 days. The half staff figure to the right shows an example, with the flag midway through the trend (move A equals B).

Flag tiltPerformance suffers when the flag slopes in the direction of the prevailing price trend. The flag tilt figure to the right shows an example of price tilting upward in a rising price trend.

Flat baseIf the flag appears above (upward breakouts) or below (downward breakouts) a flat base then expect the move to be a large one.

Tight flagsA tight flag performs better than a loose one. A loose flag is one in which price meanders, pokes outside the trendline boundary, contains white space, or looks jagged. The tight v. loose figure to the right shows an example.

Yearly middleUpward breakouts perform best within a third of the yearly high. Downward breakouts do best within a third of the yearly low.

Throwbacks and pullbacksThrowbacks and pullbacks hurt post breakout performance.

The Measure Rule

Half Staff

Flag Tilt

Tight v. Loose

-- Thomas Bulkowski

Flag Example

The above figure shows an example of a flag chart pattern. The price swing leading to the flag begins at A and ends at the top of the flagpole, B. A short flag shows for a few days and then an upward breakout takes price higher.

http://www.janarps.com/blog/index.php/2010/10/trading-flag-patterns-the-easy-way/Trading Flag Patterns the Easy Way

Posted on October 13, 2010 by Jan Arps' Traders' Toolbox

In our prior Blog post on Trading Flag Patterns, we covered the characteristics of flag patterns, how to detect and trade flag patterns using the Arps Flag indicator, and showed you that a confirmed breakout of a flag pattern is an excellent trade setup. As in many things, timing is everything in trading too. Locating flag patterns, breakouts, and putting on the trade can be tedious work, often requiring perfect timing. In this follow-up Blog we are going to show you how to overcome these obstacles in effectively trading flag pattern breakouts using two additional tools: the scanning version of the Arps Flag indicator and our new automated Flag strategy.

The Arps Flag Scanner The most efficient way to locate flag patterns and breakouts is to use a scanner, containing a list of your favorite trading symbols or any equity and futures list you wish to screen, along with a flag scanning tool. Our unique and proprietary scanning version of the Arps Flag Indicator, designed exclusively for the TradeStation Radarscreen and Multicharts scanners, provides four columns of color-coded information, as described below and depicted in the screen shot that follows, for each symbol in which the Arps Flag indicator has identified a flag pattern. Cells are color-coded Green for Bull Flags and Red for Bear Flags.

Column 1- Bars AgoThis scanning cell, unique to Jan Arps Traders Toolbox, displays a running count of the number of bars since the occurrence of the flag pattern.

Column 2- Breakout Price This column displays the price the stock must reach to confirm a breakout of the flag pattern.

Column 3- TargetThis column displays the price at which the Profit Target will be achieved for the current flag pattern. The price will match the user-controlled input settings for the chart indicator on the size of flags and profitability targets you wish to trade.

Column 4- % to TGT This column displays in percentage terms where current price is in relation to the distance from the breakout price to the target price. The Percent to Target column, % TO TGT, will be blank until a breakout has occurred. At the breakout price the % TO TGT cell will show 0%. When price reaches the target, the % TO TGT cell will show 100%. If price is half way to the target from the breakout price, for example, the cell will display 50%.

Below is an example of the Arps Flag Scanner indicator in action as installed on TradeStations Radarscreen platform. To look for the most recent flag patterns, we double click on the header of the Bars Ago column and the symbol list is then sorted with the most recently-occurring flag patterns at the top. For a daily time frame, 0 Bars Ago indicates that a flag pattern has formed today, 1 Bars Ago would indicate a flag pattern formed yesterday, and so on. Similarly, if you were to format the Symbol column to display 5-minute data, 0 Bars Ago would indicate the current 5-minute bar and 1 Bars Ago would indicate that the flag pattern was identified on the previous 5-minute bar.

The colors of the cells are user-defined. For our example, magenta will signify the detection of a Bear flag pattern and light green will signify the detection of a Bull flag pattern. After a flag is detected, a price break through the breakout price level will turn the flag cells for that symbol to dark green to signify a Bull Flag breakout and red to signify a Bear Flag breakout.

How to Scan for Flag Patterns using the Arps Flag ScannerAs mentioned above, by double-clicking on the column header Bars Ago, the scanner will sort the most recently detected flag patterns to the top of the list in descending order, starting with those detected in the current bar, bar 0. Using a linked chart window with the Arps Flag chart indicator applied, we then click on any symbol of interest in the scanner Symbol column for further analysis. In the screenshot below, we clicked on the symbol ADP, Automatic Data Processing, which formed a Bull flag pattern yesterday, 1 bar ago on our daily chart. We can continue scanning other symbols, set a Breakout Alert on this symbol or activate the Arps Flag Strategy to enter a trade automatically in the event a breakout occurs.

Recent flag breakouts that still offer excellent entry points are always of interest, so we scroll down and click on a well known stock, Cisco, which had a Bull flag breakout yesterday and the closing price is only 1% to the Profit Target. In the linked chart window below, we see that Cisco is breaking out of a congestion area, or base building period, and that the previous bull flag just barely fell short of the Profit Target. The flag has also nicely held all retracements. Based on the chart characteristics, this is a good trade candidate.

The Arps Flag Scanner, in addition to scanning for the most recent flag patterns and flag breakout signals, is useful in tracking the progression and maturity of flag pattern breakouts. In some cases, like with any strong continuation trend, you will want to participate in a breakout after the early stage. Below the linked window in our scanner highlights the symbol MO, Altria Corporation, that had a Bull flag breakout 9 bars, or 9 days ago, on our daily time frame and is 28% to the Target. With the smooth upward trend of this stock and room to go to achieve 100% of the Target, this is a good jump on board candidate.

To inspire confidence to trade flag breakouts, you can also sort on breakouts closest to the Profit Target. Below is a beautiful chart of EDP, Enterprise Products Partners, as price stretches as if drawn by a magnet to the Target line.

Taking a Position with the Arps Flag StrategyRather than having to wait and watch the screen for a Breakout Alert and enter the trade manually, we can activate the Arps Flag strategy in a new chart window on any flag pattern we are interested in trading if a Breakout occurs.

For a Bull flag pattern, the strategy upon activation enters three orders: a Buy Stop at the Breakout Price, a Sell Limit Order at the Profit Target Price, and a trailing stop using the Arps Trender.

Below is a chart of the Flag Strategy applied to symbol, COP, Conoco Phillips.

InputsThe Flag Strategy has several Inputs that are user-controlled, so that you can customize the strategy to your specific trading style and risk tolerance.

1. The Arps Trender is used as a trailing stop to protect against unacceptable losses and to protect profit. The user can adjust the sensitivity settings to increase/decrease the breathing room of the stop.

2. The Profit Target default setting is set at 100% of the length of the Flagpole. Some breakouts go on to exceed the normal Profit Target and some fail to reach it. The user can adjust the Profit Target to less than 100% or more than 100% of the flagpole length, such as 120%.

An input is provided for you to adjust the Profit Target to less than 100% or more than 100% of the flagpole length, such as 120%, entered as 1.2 in the Input cell.

3. If, after an entry, the price breaks back into the flag, it will exit on an automatic stop on the other side of the flag.

4. If, before price reaches the profit target, a new flag in the same direction is detected, the new flag will be ignored unless the Strategy Properties input is set to allow more than one trade in the same direction. If, however, a breakout of a flag pointing in the opposite direction is detected while in a position, the strategy will reverse position.

In conclusion, to trade flag patterns the easy and efficient way, you will need three indicators: the Arps Bull and Bear Flag chart indicators, the Arps Flag Scanning tool, and the Arps Flag Strategy. We have combined these tools in a new Arps Flag toolset. For a limited time we are offering the Arps Flag toolset, a $900 value, for only $497. Click HERE to go directly to the online product page.

For questions, please send an email to info@janarps.com.

Until our next post,

Best,

Jan Arps Traders Toolbox

DISCLOSURE

Jan Arps Traders Toolbox is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Customers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment.It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented in this letter are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The author and affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.