Below is a slider quiz to test your ability to identify flags and trade them. Captions appear below the pictures in red for guidance, so be sure to scroll down far enough to read them.
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Shown in red at BC is a flag chart pattern. These guys are tiny, lasting no more than 3 weeks, but often about a week or so. They appear in strong trends.
The pattern begins with a flagpole (AB). It's a very short-term trend, often straight-line to the flag retrace. In the flag, price often retraces against the trend (but not always),
forming a knot of price with parallel sides (or nearly so) like that shown from B to C by the two red lines. Contrast that to the pennant, shown here in green,
which has a narrowing price trend. Flag volume trends downward at least 74% of the time, like that shown (E). The theory of a flag is similar to a measured move.
Leg CD should approximate the length of AB, both in time and price. The CD = AB move is called the measure rule.
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Find as many flags as you can. For help, click here.
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I show three flags, at A, B, and C. If the flags are not accompanied by a flagpole, then you don't have a flag. Flag A has a downward breakout when price closes below the
bottom of the flag. Notice that B's flag slopes upward, that is, with the prevailing short-term trend.
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Find as many flags andpennants as you can. To keep flags and pennants separated in your mind (which has a converging price trend?), just
think of the parallel sides of an American flag or the narrowing sides of a pennant you often see at a fair.
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A and B are pennants and C probably is, too. C has sides which aren't parallel. D and E are flags. All have flagpoles.
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I show the flag highlighted in red. This flag will have a downward breakout, so trust me on this. How far will price drop? Yes, I'm asking you to guess, but you can
use the measure rule for flags (that is, leg CD = leg AB) See slide 1 for help or click the link.
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The correct answer is line 2. Let's go through the measure rule math. The short-term downtrend leading to the flag starts at A, at 48.39. The bottom of the flag is at B,
44.54 for a height of 3.85. Subtract that from the flag high at C, 46.21 to get the target of 42.36. In this case, the stock bottoms a bit below the target, at D. Let me also say that
it's actually rare (45%) that the full-height measure rule works.