The Technical Approach: Continuation Patterns (FLAGS)

 

The Technical Approach: Continuation Patterns (FLAGS)

As we approach the halfway point of 2020, the conversation now shifts to where we will see Crypto come the end of the year.

We use historical and empirical data when examining the development of the Crypto space in terms of using the indicators that are present that assist us in prediction analysis.

Technincal indicators are a huge component to this analysis and it is important to understand the various terms that investors and traders will come to learn as they seek to trade more timely in the market.

Traders look for trends or patterns that foreshadow how a cryptocurrency may perform should the conditions remain constant. We have seen this year where the "conditions" have directly impacted the trendlines. Things like Covid-19 or halving for example that will directly impact the manner in which a currency will perform that many not actually relate to the currency directly. 

Continuation Patterns demonstrate the nature of activity over time and how the Crypto responds to various conditions.

There are three common Continuation Patterns that are employed in evaluating where a Crypto may go moving forward. Often they do this simply looking at the preceding weeks and what are known as "averages" with regard to prices to formulate patterns.

Here are three patterns to look for:

• Pennants, constructed using two converging trendlines
• Flags, drawn with two parallel trendlines
• Wedges, constructed with two converging trendlines, where both are angled either up or down

Today we examine Flags.

Flags form a narrow trading range after a strong price increase or decrease. The difference is that flags move between parallel lines, either ascending, descending, or sideways, while a pennant takes on a triangle shape.

Often Flags move in a counter formation than the trend and typically on higher than normal volume. Typically following a prevailing trend.

How to Trade a Flag Pattern- Investopedia (Gordon Scott)

Using the dynamics of the flag pattern, a trader can establish a strategy for trading such patterns by merely identifying three key points: entry, stop loss and profit target.

1. Entry: Even though flags suggest a continuation of the current trend, it is prudent to wait for the initial breakout to avoid a false signal. Traders typically expect to enter a flag on the day after the price has broken and closed above (long position) the upper parallel trend line. In a bearish pattern, the day after the price has closed below (short position) the lower parallel trend line.
2. Stop Loss: Traders typically expect to use the opposite side the flag pattern as a stop-loss point. For example, if the upper trend line of the pattern is at $55 per share, and the lower trend line of the pattern is at $51 per share, then some price level below $51 per share would be a logical place to set the stop-loss order for a long position.
3. Profit Target: Conservative traders may want to use the difference, measured in price, between the flag pattern’s parallel trend lines to set a profit target. For instance, if there is a $4.00 difference and the breakout entry point is $55, the trader would place a profit target at $59. A more optimistic approach would be to measure the distance in dollar terms between the pattern’s high and the base of the flagpole to set a profit target. For example, if the lowest price of the flagpole is $40, and the top of the flagpole is $65, and if the breakout entry point were $55, then the profit target a trader might expect to see achieved would be $80 ($55 plus $25)