The flagpole forms on an almost vertical price spike as sellers get blindsided from the buyers, then a pullback that has parallel upper and lower trendlines, which form the flag.
The initial rally comes to an end through some profit-taking and price forms a tight range making slightly lower lows and lower highs.
Eventually, the price peaks and forms an orderly pullback where the highs and lows are literally parallel to each other, forming a tilted rectangle.
This illustrates that there is still support in the market although the unwinding of some large long positions and traders entering short positions looking for a reversal forces the price to drift in a downwards direction.
During the consolidation, traders should be prepared to take action should price break up through the upper range level and/or make a new high as this indicates the bulls are in control again to push another rally.
Upper and lower trendlines are plotted to reflect the parallel diagonal nature.
The sharper the spike on the flagpole, the more powerful the bull flag can be.
The bear flag is an upside-down version of the bull flag.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.