The flag pattern creates the most exact predictions of all continuation patterns. Therefore, it is very attractive for traders. The flag pattern can help you create a strategy with a high payout and a high winning percentage. It is a very important pattern every technical analyst and binary options trader should know.
The flag pattern usually occurs after a strong price movement in either direction, when prices have to go through a period of consolidation to generate new momentum. During this time, market movements are limited to corridor between two parallel lines, inclined in the opposite direction of the preceding trend.
In a downtrend, a flag is completed by prices breaking through the upper line; in an uptrend the flag is completed by breaking through the lower line.
As you can see in the picture above, in contrast to other continuation patterns, the flag pattern in itself creates a trend in the opposite direction. This trend, while short lived and less steep than the preceding trend, can trick traders into thinking the main trend is over and therefore invest in the wrong kind of assets.
In a bullish trend, a flag will include a trend in a bearish direction. In a bearish trend, a flag will include a trend in a bullish direction. Do not get confused by this. After the flag is over, prices will likely continue moving in their previous direction.
The flag is especially interesting for trading a touch option. As a rough rule, technical analysts say that flags usually wave at half mast.
In other words: Once the flag is completed, you can expect prices to continue moving at roughly the same rate for roughly the same distance as they did before the flag was created. This is a perfect prediction for trading a touch option. If you can find a touch option with a realistic target price and long enough expiration time, you can invest in that prediction.
Of course, this is a somewhat more risky trading strategy, as many other factors could possibly influence the movement after the flag is completed. Still, with a touch option, you will get a good payout, and you should be able to win a high enough percentage of your trades to run this strategy with good profits.
In any way, you can trade the flag like any other continuation pattern. You can invest in a High / Low option once the pattern is completed, to use the momentum generated by the price breaking out of the pattern. In the early stages of the flag, you can also use the flags upper and lower resistance levels to trade no touch options with a target price outside the flag, predicting the prices will turn around once they reach the resistance. This strategy is especially useful with the near side resistance of a flag, since it usually does not get broken. In an uptrend, the lower resistance level would be the near side, and in a downtrend the upper resistance level would be the near side.
Of course, flag patterns are rare. Trading opportunities are limited, and you will have to monitor a number of different time frames and assets to find a good trading opportunity. Since flags form after a steep incline or decline in prices, they are most common in smaller time frames. Your best chances of finding them are in an hourly chart or even smaller. In bigger timer frames, prices usually move more smoothly, which makes flags even harder to find.