Bulkowski’s High and Tight Flags

Written and copyright © 2009-2010 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 350 to 361. 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.

High and tight flags are the best performing chart pattern in both bull and bear markets. Even though the break even failure rate is 0%, this pattern does fail. Don't count on making a 69% average rise either. That’s an average of hundreds of perfectly traded trades, something no one can do.

Important Results Identification Guidelines Trading Tips Example Other Examples See Also

High and Tight Flag

Identification Guidelines

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 take half of it. Add it to the bottom of the flag (C) to get the target (D). Breakout Only buy when price closes above the highest peak in the chart pattern (including the flagpole). That is point B in the Measure Rule figure to the right. Buying sooner risks price never confirming the pattern (in other words, price drops or moves horizontally for months). And yes, I know this is different than what I wrote in my book. HTFs fail too often when using a flag trendline break. Instead, place a buy stop above the highest high in the chart pattern. Tight patterns Trade tight flags, not loose ones. Tight flags perform better than loose ones. A loose flag is one in which price meanders, pokes outside the trendline boundary, contains white space, or looks jagged. See the figure to the right. Trends An intermediate-term (3 to 6 months) drop leading to the start of the price upswing results in the best post breakout performance. Retrace Keep the flag retrace (see BC in the Measure Rule figure to the upper right) of the prior up move (AB) less than the 36% median retrace for the best performance. Slope Price trends of 45 degrees or so in the flagpole mean a better post breakout rise than ones that go nearly vertical leading to the flag. Width Flags (excluding the flagpole) less than the median 15 days wide tend to do better post breakout. This is the horizontal distance from B to C in the Measure Rule figure to the upper right. Trendline Flags with a down-sloping top trendline tend to outperform. Trendline Trade For steep price trends, use a volatility stop and draw a trendline beneath price. If price closes below the trendline, then consider selling. For an example, look at IIIN from January to April 2006. The HTF starts in January and price more than doubles in less than 2 months, eventually rounding over at the top.

The Measure Rule Tight v. Loose

Example

The above figure shows an example of a high and tight flag chart pattern. Price begins the rise in October at 9.36 and rises to 17.80, a climb of 90% in less than 2 months. Then price moves sideways, forming an ascending triangle. When the breakout occurs, it confirms the high and tight flag chart pattern as a valid one and price resumes the up trend. Price tops out at 23.72 less than 2 months later, a rise of 33%.

Other Examples

• Ann Taylor (ANN) trade: high and tight flag entry, sell in May and go away exit, 78% in 9 months.
• High and tight flag in AMR.
• High and tight flag in VRTX.
• High and tight flag in RMIX.
• High and tight flag in CLR.
• High and tight flag in MOS.

-- Thomas Bulkowski

Written and copyright © 2009-2010 by Thomas N. Bulkowski. All rights reserved. 24 hours in a day; 24 beers in a case. Coincidence?