Flag patterns are similar to pennants but are often smaller. This offers traders the benefit of a low-risk investment associated with quick profits. Like the pennant, the flag pattern is based on the market price consolidation of a particular stock. The consolidation will have a narrow range and happen just after a quick upward move. Like the pennant, this pattern has a flag “pole,” which can represent a vertical price fluctuation. These fluctuations can be bearish and bullish, and if you know how to spot these patterns is can give an investor a great advantage.
For bullish patterns, the beginning will start with a sudden spike that can take many investors by surprise and cause a volume frenzy because many are trying to buy in before and during the wave of investment coming in. After a while, the price will peak and form a slight reversal giving the appearance of a tilted rectangle. A breakout occurs when the resistance trend line is broken as the prices begin to rise again and then an explosive price shift as another breakout occurs as the quick trend upward continues.
Bearish patterns are simply the inverted form of the flag pattern, which indicates a panic price drop with an almost vertical initial drop. This time, when the trend line breaks, it will have panicked sellers selling to bring about another downward-pointing leg in the pattern. How strong the drop is on the flag pole, in this case, is also the indicator of how bearish this pattern will be, and the wise investor will act accordingly.