Two types of flag in trading
Horizontal flags, a.k.a. Trading Ranges
These flags are the strongest type of flag, indicating that the opposite side is incapable of reversing the trend.
This type of flag is weaker than the previous one. The opposite side of the trend is capable of creating highs/lows, impacting the global trend of your analyzed chart.
- Before trading with flags, always check out the trend before. You can do this by drawing the trend lines (see our blog post here)
- After checking the trend, check out the candles within flags. Less than 20 bars in a trading range is acceptable, but more than 20 is too risky because it will bring you a 50-50 chance of breakout. Also, in flags with minor highs/lows, you may check the latest major high/low, and the opposite trend must not reach that major high/low, otherwise the global trend may be reversed.
Let see that with an example, let analyze Bitcoin: On a week view, we can see a large range of a strong uptrend. This range is an ascending flag, but with more than 20 candles; it indicates that both sides of the market are active (ascending and descending). Within this range, a tight downtrend channel has formed over the past few weeks. We don't have a downtrend before this channel, however we consider it an ascending flag, and expect it to break upwards.
Thanks to Amir Soraya, Flags trading TW for his help writing this article.