Flags and pennants

Flags and pennants are short pauses in a fast move. The name comes from the picture: the steep move is the flagpole, the pause afterwards the flag.

What it's about

With a flag, the price drifts slightly against the direction in a narrow channel after the pole. With a pennant, it contracts in a small triangle. Both usually last days to a few weeks.

How to recognise it

• A steep, almost vertical move beforehand.
• Then a short, narrow pause.
• The pause runs slightly against the previous direction or as a small triangle.
• A breakout in the pole's direction completes the pattern.

How the price target is estimated

The length of the flagpole is added to the breakout point. Pole from €20 to €26, so €6, breakout at €25.20: the target is €31.20. Because the pole was often very steep, this target is ambitious.

Where it misleads you

After a steep rise many buyers are already in profit and just waiting for a chance to sell. The flag then turns into a longer decline. This happens especially often with news driven stocks whose rise rests on a single announcement.

An example trade with made up numbers

Ole has €10,000 in his account and risks at most €150 per trade. A stock has risen from €20 to €26 in a few days and has been drifting in a narrow flag since. Now it breaks out upwards. Ole buys at €25.20 and sets his stop loss at €24.20. With that distance, he buys 150 shares for €3,780. Costs: €1 each to buy and sell, plus about 2 cents of spread per share on each order.

If it works: The price rises to €28. As momentum fades, Ole sells before the estimated target. Ole is €420 ahead. After €2 in fees and €6 in spread, €412 is left.

If it goes wrong: The breakout fails and the stop fills at €24.10. That's a €165 loss, €173 with costs.

Ole didn't wait for the full target. Flagpole targets are often not reached, and a part is better than a gain that disappears again.