Some notes on flags

AdamAdam Grimes's blogs, Technical Plays, Trading Lesson, Trading Theory1 Comment

I just wanted to write a short post (yes Bella, I can write a short one) on flags to reinforce a few points Bella made in this post earlier today.  I am in the middle of doing a thousand other things tonight, so excuse the stream-of-consciousness format here.

The concept of a flag is a pullback in a trend.  There are many ways to define these patterns, but the most important is that you are consistent and you understand the nuances of the pattern as you define it.

In the new Advanced Technical Analysis Training Module that we are working very hard on (more on this later, but I am excited to say that we are creating something really awesome here), the flag pattern is a main focus.  There are traders who make their living just trading pullbacks.  There are a lot of subtle variations but, to the poster asking the question, you have focused in on a powerful pattern.  This, in fact, is my bread and butter trade and has been for a decade.  (In all timeframes btw.)

Some elements you need to consider:
What sets up the pattern?
How important is the geometry of the pattern?
How important is the higher timeframe?
How important is the location of the pattern within the overall trend structure?
How will you get in? (Short resistance, hit momentum on a breakdown within or beyond the pattern.)
Where will you get out if you’re wrong?  Is this answer different on different markets and timeframes?  Is this answer different depending on where the flag is in the overall market structure?
Where will you get out if you’re right?  [Same list of questions applies.] Will you scale in or are you all in?  Will you scale out or are you all out?  Is this answer different for winning and losing trades?
Will you add to winning trades?  How?  Where?  How do you manage these trades?

I could go on, but you get the idea.  It is important also (and I’ll write on this more in the future) to realize that there actually are right and wrong combinations of these answers.  Every trader has to find her own answer to these questions, but we should point out that some things don’t work.  For instance, you can give these a lot of room to your stop, but this will not work if you’re taking tiny profits… many other wrong answers and pitfalls to avoid.

I hate answers to questions that are just more questions, but these are a few of the things you need to think about.

This pattern is a major part of my intraday focus.  I will try to tweak some flag patterns over the next few days so follow me on Twitter AdamG_SMB.

One Comment on “Some notes on flags”

  1. Adam,

    Thanks for sharing some insights. I used to just pay/hit whenever the flag breaks. However, paying/hitting with this pattern is not really a rewarding tactic for me because of my tighter stops. As such, I’ve found myself actually trying to accumulate some shares at the bottom/top of a flag, in front of a held bid/offer or an identifiable buyer/seller.

    You mentioned the “geometry” of the pattern and this is where I get into a bit of trouble. For example, there are some bear flags that drift upwards, creating a shape that resembles a parallelogram. I find it harder to accumulate shares on these types of flags, as the upward drift makes me unsure of where to place my stop. It feels like I’m trying to pick a top with these types of flags.

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