According to Thomas Bulkowski one of the most profitable technical patters os the high and tight flag pattern, breaking higher. According to Bulkowski, when properly recognised, it can reach target up to 90% of the time. So, here is what you need to look for to recognise them.
Recognising the pattern
Here are the steps to recognising the pattern
- First of all you need to witness a steep and sharp price trend. (ideally over 90% gain)
- Ideally this price move should be around 45 degrees
- You then need to see price form a small channel that resembles a ‘flag’ pattern.
- The best performance comes from when the flag slopes away from the preceding trend
- Flag formations should form over a few short days – ideally less than 15 days
- Use the measured rule to aim for your target. So, the height of the move preceding the ‘flag’ formation is the measured target from the breakout of the pattern.
- Use a trailing stop to lock in profits
- The trade entry is simply the break of the pattern and stops can be placed the other side of the pattern
Here is a look at what the Flag pattern should look like
Why the pattern works
The most likely reason the pattern works is that by definition you are already entering a trending market. That is a pre-requisite for finding the pattern. This pushes the odds in your favour and, when combined with a trailing stop, you can see why some traders focus on trading the flag and pennant pattern in isolation. This pattern is probably easiest to use when you have fundamental reasons to see a market rapidly rise higher.