One of the first experiences most traders learn when they start trading is price action trading and one of the most popular price action pattern that you probably have heard is the pattern.
The is a very simple continuation pattern that develops after a strong .
It doesn’t really matter if your preferred time frame is the 5-minute chart or if you prefer long-term chart because the pattern shows up with the same frequency on all time frames.
A continuation pattern, like the , brings some good news because it tells you that after the market has gone down it will continue to go down more.
In addition to that if you missed the initial sell off and the market has gone without you, if you spot the pattern on that chart, then this is a sign and a safe place to sell so you can enjoy the rest of the .
What is a Pattern?
A pattern is constructed by a descending trend or followed by a pause in the trend or consolidation zone. The strong down move is also called the flagpole while the consolidation is also known as the flag.
The pattern will always come after a strong move downwards and the stronger the move the bigger the profit potential can be.
The pattern highlights a trading environment where the balance has shifted badly in one direction of the market (supply > demand). This in turn will produce very little upside retracement which allows the flag structure to take shape.
After the initial sell off, people who missed the train will panic and begin selling and more people selling it during the flagpole stage.
During the pause or the narrow consolidation people will now wait to get higher price so they can sell but since the supply demand equation is so imbalanced this won’t happen and we get another smash that will make many people to chase again the move to the downside.
Step #1: Look for evidences of a prior . For a valid you need to see a sharp decline.
Just because you can spot the pattern it doesn’t mean you have to jump straight into the market and trade it.
Remember, we need the right context and the right price structure needs to line up for a tradable .
A valid first needs a sharp decline which is a strong evidence of a and the fact that the are out of balance.
Note* The sharp move is also the Flagpole – the first element of the structure.
Step #2: Identify the Flag price formation. The price action needs to move in a narrow range between two parallel lines.
The flag price formation is the second element of the pattern.
Basically, all you need to do is to spot one support and one that must contain the price action in a very narrow range.
The narrow range is key for the pattern success rate.
Step #3: Sell at the closing candle that generates the .
There are two basic approaches to enter the market with the pattern. Aggressive traders will enter at the top of the as this will secure a little bit of bigger profits.
If you’re a conservative trader you can wait for confirmation provided by the .
Step #4: Place the protective stop loss slightly above the Flag.
We’re accomplishing two things with our tight stop loss: Small losses.
Higher risk to reward ratio.
With such a tight stop loss you’ll have the comfort of losing many trades in a row because with the amazing RR the can potentially wipe out all your losses in a single trade and still come profitable.
Step #5: Take Profit target equals the same price distance of the Flag pole measured down from the top of the .
The text book profit target is the height of the flag pole measured down from the top of the flag.