Flags are also considered to be continuation patterns, generally forming after strong moves.
Following a relatively large upward or downward move, buyers or sellers usually reach a stalemate or point at which there is little movement along the trend, volume then increases generally in the same direction. The price usually consolidates and forms a triangle or Flag pattern.
While the price is still consolidating, volume increases, forcing the price to break out of the flag pattern.
A bearish flag is formed during a steep downtrend. Following the drop in price, some sellers close their positions while other buyers decide to change their position, making the price consolidate.
When the flag can take no further pressure, the price breaks below the bottom of the flag and continues to move down on its original underlying trend.
To trade this chart pattern, simply put a short order at the bottom of the flag with a stop loss above the flag. That way you can restrict potential losses, in case the downward break is a fake out.
Unlike the other chart patterns wherein the size of the next move is approximately the height of the formation, flags can signal stronger moves. Usually, the height of the earlier move (the mast) is used to estimate the size of the breakout move.
The opposite to the bearish flag, a sharp climb in price would resume after that brief period of consolidation, when buyers gather sufficient volume to continue the price higher again or the sellers close out further positions.
In this example
As with trading the bearish flags simply apply the opposite logic, place our long order above the flag and our stop below the bottom of the flag to avoid potential fake outs.
Potentially the size of the breakout move can be around the height of the mast (or the size of the earlier move) or greater.