One of my favorite trading patterns is a bullish flag pattern. This is a continuation pattern that typically occurs after a strong upward price movement.
Lets break it down.
Context: Imagine a market where prices have been rising steadily, in a strong uptrend (typically seen on a larger time frame chart (15 min, 60 min, 4 hour)
Bullish Movement (Flag pole): During this upward movement, there is a significant price surge, known as the flagpole. This represents a strong bullish sentiment among traders. Major reports (FED, PPI, CPI, NFP) or Earnings reports (as in this example, NVDA reported after hours) can be a catalyst for a flagpole to develop.
Consolidation (Flag): After the flagpole, there's a period of consolidation where prices move sideways in a rectangular or a channel-like pattern. This is the "flag" part of the pattern. Flags can have very strong support and resistance and this consolidation is building for a bigger move. 60% of the time, the breakout is in the direction of the trend!
Breakout: The pattern concludes with a breakout to the upside, indicating a potential continuation of the previous bullish trend.
When this breakout happened on Friday, March 1, I took this trade Long for a very nice +25 point multi contract trade.
For me, the key was recognizing the pattern and when it broke out, to be ready to take the trade. I was not surprised that it broke out after multiple days of consolidation.
Tools Used: Traders often use tools like trendlines to identify the flag and measure the potential price target after the breakout.
Determining Target
Measure the Flagpole: Identify the length of the flagpole, which is the distance from the low to the high of the initial strong upward movement. This will serve as a reference for potential price movement.
Apply the Measurement: Once you've measured the flagpole, you can apply this length to the breakout point. The breakout point is where the price surpasses the upper trendline of the flag, signaling the continuation of the bullish trend.
Price Target Calculation: Add the measured length of the flagpole to the breakout point. This projected distance provides a potential target for the bullish move.
In this bull flag, we can calculate the bottom of flag pole to the top of Flag Resistance, thus +149 point break out rally. This leads me to believe that this rally is not over yet. Rally's can take days or weeks and typically are never in straight line.
Remember, this is a theoretical calculation, and actual market conditions may vary. It's essential to use this as one of several tools in your analysis and consider other factors such as support/resistance levels, market sentiment, and broader economic indicators.
Hopefully identifying Bullish Flags can help you see the structure and when a breakout occurs you are prepared to enter into a breakout trade. For more info on breakout trades - check out this blog https://www.futuresnetworks.com/post/breakout-trading-strategy
Trade Well at FNL!