Flags

Flags are a type of short-term pause in the dynamic and progressive movement of a market trend. Flags are usually marked by a sharp, almost horizontal entry into the pattern. Flags are bound by parallel lines of support and resistance. The pattern is commonly followed by a sharp break back into the prevailing trend. Flags have a tendency to form slanted in the direction opposite to the major market trend they inhabit.

On the right, is a flag that interrupts an uptrend. It is short lived, and there is a substantial breakout when price moves above the line of resistance.

Below, is a flag pattern during a downtrend, that plays out in a long timeframe. The consolidation phase lasts two months but does not turn into a new trend. The line of support is broken, ending the flag pattern and continuing the downtrend.

Rectangles

A Rectangle is a period of consolidation within an existing trend where the price moves sideways, fluctuating between two horizontal lines before finally resuming its previous trended course. Such a pattern is not very significant to the trend’s future course – a rectangle seldom accelerates the prevailing trend beyond its previous slope. Though not characteristic in determining any anomalous effects in the presiding trend, a rectangle pattern presents an opportunity to trade within, as one can open alternating positions as the price repeatedly bounces from support to resistance and back.

A theoretical sketch of a rectangle in a downtrend and an uptrend is shown on the right.

A real world example is presented below. An uptrend that was started in September enters a period of consolidation in October. Price forms a rectangle pattern before the uptrend continues. You can see a flag pattern emerge a couple of months later as well.