The Flag pattern usually occurs after a significant up or down market move. After a strong move, prices usually need to rest. This resting period usually occurs in the shape of a rectangle, thus the word “flag”.
The Flag is considered a continuation pattern because after resting, prices will usually continue in the direction they did before.
The chart of eBay (EBAY) shows many Flag patterns:
Flag Potential Buy Signal
When price has moved higher and prices have consolidated, creating a channel of support and resistance, a potential buy signal is given when prices penetrate and close above the upward resistance line.
Flag Potential Sell Signal
Assuming prices previously moved downward, then after a period of price consolidation, a potential sell signal is given when price penetrates and closes below the support line.
For more information on the concept of support and resistance, (see: Support & Resistance).
Another similar pattern discussed is Triangles (see: Triangles).
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