Flags are usually continuation patterns. They represent brief pauses in a trending market and are typically seen after a leg in the direction of the trend. Market participants take some profits and the price is moving in a range forming the chart patter. The price action is contained within two parallel lines that point in the direction opposite to the trend. That is why is said that the “flag waves in the opposite direction”. The volume goes down during the formation of the pattern and increases sharply during the breakout. The breakout is usually in the direction of the previous price trend. Flags are one of the most popular and reliable continuation patterns.

There are two types of flags:

• Bull flags are characterized by lower highs and lower lows and appear during an uptrend.

• Bear flags are characterized by higher highs and higher lows and appear during a downtrend.