Chart Patterns – Bullish Flag

The Bullish Flag Pattern is a continuation chart pattern, and is considered as one of the most powerful and consistently reliable patterns in trading. It is a continuation pattern that represents a brief pause within an already existing uptrend and typically occurs in the middle of a large rally.

This is the general appearance of the pattern. The first part of the formation is the “Flagpole.”

It is the key characteristic of this formation and it is formed initially by a strong and continuous price action in one direction.

There are no significant retracements during this time, thus giving the appearance of a straight “Flagpole”.

The Flag pattern forms on top of the Flagpole when the initial demand slows down. Price moves gradually downwards but in a steady trading band. This band is usually a channel with parallel sides. Once the upper trend line has formed along a minimum of 2 lower highs, we plot a parallel line on the most recent low in the emerging pattern, thus giving us the Flag pattern. On confirmation of the pattern we should enter a trade when price break out of the upper trend line, in the direction of the previous trend. The ideal place for a stop would be just beneath the lower trend line, thus giving the price enough room to move within the bounds of the pattern. We do not want to be stopped out before the pattern develops fully. The pattern would stand negated if price closes below the lower trend line or if the price consolidates within the channel for a considerable amount of time. Once in a trade, this pattern gives us an exact target. To calculate the potential target we measure the height of the flagpole. This distance is then projected upwards from the point where price breaks out of the upper trend line. This gives the minimum target, which in most cases is exceeded. When the breakout occurs, price should move with a lot of momentum and approach the projected target rapidly.

In this chart example we have marked the initial Flagpole in blue where price rallies strongly without any major retracements.

After forming a top, the price starts moving down gradually in a channel forming the flag pattern.

Once we have this formation and price starts to rise to the upper trend line we should start preparing for the trade.

We enter the trade on the breakout of the channel and place our stops beneath the lowest low of the channel. We then calculate our target by the length of the Flagpole added to the breakout point of the channel. As we can see, price rallies again with a lot of momentum and reaches the calculated target. Thus this pattern offers a reliable, high-probability trade with good returns and easy trade management. You could also use your favorite indicator to help confirm that the breakout is real. In the example above you can see that the MACD gave a buy signal around the same time as the breakout. This gives even more confirmation that the breakout is real.

Good Trading
Mark McRae

Trading System

Now you have decided that you are going to trade a particular security and you need to find a way of entering and exiting the market. So, how do you approach it, do you just jump in with a gut feeling or do you use some kind of system to help you make the decision.

We will look at a few ways traders decide on the best way to make a decision.

First there is just guessing which way the market is going to go. Now as surprising as it may seem there are many trader who do just that. They take a look at a chart or some news and then decide if they should buy or sell.

If they make money consistently then it is hard to argue that this is the wrong way to trade the market. The problem I see with this type of trading is that it is almost impossible to reproduce results consistently.

In other words the trader that trades by instinct can never really pass on his knowledge, as there is no clear rules that he applies to the market on a regular basis. I know a few trader who trade like this but unfortunately I don't know any who have gone the distance and are there year after year.

Traders who apply a method to their trading inevitably have better results. If you use the same criteria to each trade then you at least have a reference point from which to work. If you are losing you can then change specific things in you're decision making process in order to find the right criteria. By using a method in your trading you are moving towards the scientific approach and just as a scientist will carefully research and record each experiment so should the trader trying to perfect the method he is using.

If you apply XYZ as your reason for entering a trade and you can see after a predetermined amount of trades that it is not working then you can change X, Y or Z until you find something that does work. Typically the method trader has researched a particular theory he has by doing back testing (applying the theory to historical charts) and comes up with indicators, tools or some other method of determining the entry and exit criteria. If at the end of his research he find that he can make money he will then apply that method to the market.

As he still has to make the decision to enter or exit a trade there is still the human element to consider. Even though his method tells him he should enter a trade for some psychological reason he decided not to take the trade. There lies the weakness of the method trader. Even though he knows he should enter or exit a trade he doesn't because at that particular moment in time some voice inside him tells him not to do it. The solution is to make it mechanical as much as possible.

Mechanical trading systems. There has probably been more written about mechanical trading systems than any other topic in trading. The premise of mechanical systems is that a particular theory he's been beck tested over a long period of time and has consistently made money. There is no emotion involved with the decision making process at all. If the system says buy the security then you buy or an order is automatically done for you.

This takes away all the emotional up's and downs and all you have to do is buy the system and supply the money. I have been in heated debates with other traders about the value of mechanical trading systems. Some traders swear by them and others think they are a waste of time.

Which is true only the individual can answer. My own personal experience with systems after having tried a few is that they typically produce unspectacular results and after a time they tend to blow up and lose money.

The other reason I am not particularly fond of systems is that when you experience large draw down (your account goes backwards) you tend to lose faith in the system just before it kicks in.

Conclusion
Trading just as in life there are no correct ways to trade only what suits the individual. Some people will be suited to giving it their best bet whilst other will prefer to use a particular method and yet others will prefer mechanical systems.

It's difficult to argue with a man who is making money. My own personal preference is to use a well thought out method, which is 90% mechanical, but the final decision is left to me. Nothing will beat your own research and hard work. If you can find a successful trader and ask him to mentor you this will save a lot of time on the learning curve. Learn every thing you can from him and then adapt it to suit your own style of trading. On closing, ask yourself this question? If you really did have the goose that laid the golden eggs would you sell it?

Good Trading
Mark McRae