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Written and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 335 to 349. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Flags appear as small rectangles usually tilted against the prevailing price trend and mounted at
the end of a flagpole. If you don't have a straight-line price run (the flagpole), then you don't have a flag. The best
performing flags have a long, near vertical flagpole.
Two Ideal Flag Patterns
Important Bull Market Results*
Overall performance rank for breakouts: Not applicable
Break even failure rate for up/down breakouts: 4%; 2%
Average rise/decline: 23%; 16%
Throwback/pullback rate: 43%; 46%
Percentage meeting price target for up/down breakouts: 64%; 47%
* The performance results
for flags are based on the short-term price swing, not the change from the breakout
to the ultimate high or low as in most
other chart patterns.
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Can be any direction leading to the chart pattern. |
| Shape | Looks like a small rectangle often tilted against the prevailing price trend. |
| Trend lines | Prices move between two parallel, or near parallel, trendlines. |
| 3 weeks | Flags are short, less than 3 weeks long. Patterns longer than that are rectangles or channels. |
| Flagpole | The flagpole which leads to the flag should be unusually steep and last several days. |
| Volume trend | Downward trend 71% of the time. |
| Breakout | Upward 54% of the time. |
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Trading Tips
| Trading Tactic | Explanation |
| Measure rule | Compute the height from the start of the price swing (point A in the measure rule figure to the right) to
the end of the price swing (B) and then multiply it by the above “percentage meeting price target.” Add it (upward breakouts) to
the bottom of the flag (C) or subtract it (downward breakouts) from the top of the flag (C) to get the
target (D). |
| Half staff | The average move from the trend start to the top of the flag is 22% in 15 days. The move from the flag low to the trend end is 23% and
takes 19 days. The half staff figure to the right shows an example, with the flag midway through the trend (move A equals B). |
| Flag tilt | Performance suffers when the flag slopes in the direction of the prevailing price trend. The flag tilt figure to
the right shows an example of price tilting upward in a rising price trend. |
| Flat base | If the flag appears above (upward breakouts) or below (downward breakouts) a flat base then expect the move to be a large one. |
| Tight flags | A tight flag performs better than a loose one. A loose flag is one in which price meanders, pokes outside the
trendline boundary, contains white space, or looks jagged. The tight v. loose figure to the right shows an example. |
| Yearly middle | Upward breakouts perform best within a third of the yearly high. Downward breakouts do best within a third of the yearly low. |
| Throwbacks and pullbacks | Throwbacks and pullbacks
hurt post breakout performance. |
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 The Measure Rule
 Half Staff
 Flag Tilt
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 Tight v. Loose
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Example
The above figure shows an example of a flag chart pattern. The price swing leading to the flag begins at
A and ends at the top of the flagpole, B. A short flag
shows for a few days and then an upward breakout takes price higher.
-- Thomas Bulkowski
Written and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved. Computers make very fast, very accurate mistakes.
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