Flag and pennant

A stock runs up sharply, then stops. For a while it moves sideways, or drifts slightly lower, inside a narrow band. Then it takes off again.

The sharp move before the pause is called the flagpole. The pause itself is the flag or the pennant.

Which of the 2 names applies depends only on the shape of the pause. A rectangle is a flag. A small triangle is a pennant.

Both are continuation patterns. They say the trend is resting, not turning. And both are traded the same way.

Chapter 15.6.4 treats flags and pennants together, and says they "are often used interchangeably." They are continuation patterns and "are traded in the same way, but each has a slightly different shape."

How they form. Price moves sideways or slightly lower after a sharp rally. That sideways movement "typically takes the form or a rectangle (flag) or a small triangle (pennant), hence their names."

The parts. The sharp price rise preceding the pause is the flagpole. Trendlines can be drawn along the highs and lows of the sideways price action to mark the flag or pennant itself.

The trade. Once the flagpole and a flag or pennant have formed, traders watch for price to break out above the upper flag or pennant trendline, and then enter a long trade. The sideways period is often followed by another sharp rise.

On figures. The workbook gives no number for this pattern — no minimum flagpole size, no maximum duration for the pause, and no profit target rule. That is worth noting precisely because the ascending triangle in 15.6.2, a few paragraphs earlier, does get a target rule: take the height of the triangle at its thickest point and add or subtract it from the breakout point. Do not carry that rule across; the workbook does not apply it here.

Illustrative. A stock moves from Rs 220 to Rs 268 in 6 sessions — a rise of Rs 48, or 21.8%. That sharp run is the flagpole.

Over the next 9 sessions it goes nowhere, oscillating between Rs 258 and Rs 266. Trendlines drawn along those highs and lows are roughly parallel, so the pause is a rectangle — a flag.

A trader waits. On session 16 the price closes at Rs 271, above the Rs 266 upper trendline. That breakout is the entry the workbook describes, and the long trade is taken there rather than during the sideways drift.

Now change the shape of the pause. Suppose instead the range narrows session by session, from Rs 258 to Rs 266 down to Rs 262 to Rs 264, so the 2 trendlines converge into a small triangle. That is a pennant rather than a flag. The name changes; the trade does not. A break above the upper trendline is still the signal.

Chapter 15.6.4 (Flags and Pennants Pattern) closes section 15.6, which the workbook heads Chart Consolidation Patterns, after the symmetrical, ascending and descending triangles. The chapter's learning objectives name all 4 explicitly: "Identify continuation patterns: Triangles, Flags, Pennants, and Rectangles."

Section 15.4.3 also states that a tertiary trend "forms building blocks of larger chart patterns like flags, pennants, or wedges" — a link between the 2 sections that a question can be built on.

Expect to be asked whether these are continuation or reversal patterns, what the flagpole is, and what distinguishes a flag from a pennant.

• Continuation, not reversal. These patterns say the trend pauses and resumes. Grouping them with the reversal patterns of 15.5 is the most costly error here.
• The flagpole is not part of the flag. It is the sharp move that comes before the pause. The flag or pennant is only the sideways portion.
• Flag versus pennant is purely a matter of shape — rectangle versus small triangle — and the workbook says they are traded the same way and often used interchangeably.
• The entry is the breakout above the upper trendline, not the formation of the pattern itself.
• Do not import the triangle's profit target. The measured-move rule in 15.6.2 is stated for the ascending triangle; the workbook attaches no target rule to flags or pennants.