Disk 3.1 Flags in Detail

Bull Flag

Disk 3.1 deals with two subjects. Firstly, the recognition of the different types of flags and when and where they are likely to occur and then the use of other, easily available, information particularly xxxx Censored xxx (see 3.2) that is likely to determine the direction of the breakout when it occurs.

Dealing with the chart patterns, Guy identifies what flags he is looking for, what makes a good flag and the characteristics of flags to stay away from.

Bull flags

He describes the 3 features of the classic bull flag being the strong price movement to create the flagpole followed by a price drift slightly downwards over several trading periods while buyers and sellers make up their minds and then the breakout as one takes precedence over the other.

Matching this with the volume pattern indicator is clearly illustrated, indeed the whole course is supported throughout with multiple graphics to illustrate exactly what Guy is talking about.

Rising Wedges

Rising Wedge

The whole point of a flag pattern is that it provides clear entry and stop loss points which minimise the traders risk. A rising wedge, to the contrary, does not provide those clear points and is to be avoided. The essence of Flag-Trader is the security enabled by a disciplined approach to trading and Guy is as strong on those things to avoid as he is in identifying potential profits.

Bear flags and falling wedges

His methodical approach to training continues as he illustrates the characteristics of a good bear pattern to be used in a downward trend. Equally, the hazards of a falling wedge having the same risks as a rising wedge but in opposite circumstances..

Cup and Handle

The cup and handle is another well known chart pattern indicating a breakout and frequently attracts a lot of attention. By illustrating 4 different variations on how the cup and handle can develop Guy not only addresses his students education but also provides choices between aggressive or conservative trading.

The handle is, of course, a flag formed on the flagpole of the rising edge of the cup. So the ability of the software to easily find the flag means that it is also finding pretty well every cup and handle that develops. This illustrates the point that this method is not about selecting stocks to trade but about finding profit opportunities no matter what stock they occur on and then trading it with minimum risk.

The whole premise of Flag-Trader is that it is trading volatility and Guy repeatedly makes the point that market movements are unpredictable. So although continuation patterns in general indicate that a stcok has a high probability of continuing to move in the direction of the trend this is not guaranteed and flag patterns may fail.

Covering all the bases again, Guy illustrates the rounded tops and bottoms that develop if a bull or bear flag fails to develop. He also covers the recognition of the Doji bar and the Volume Spike which may indicate a reversal and the end of a trend. However, anyone trading regularly using the Flag-Trader strategy is unlikely to be too concerned as the combined process of using the Tradefinder software then visually scanning a small number of candidates for quality of pattern would mean that such reversals figured only as a matter of curiosity for the trader.

Low risk

The low risk nature of using Flag-Trader is one of it's major benefits and Guy uses the failure of flags to break out to illustrate this point. Even when trade orders have been placed on likely looking flags those trades and the contingent stop loss order are only triggered if the price moves beyond the price at which the order was placed. So the market has already shown it's hand before any of your money is committed.

Should the price never reach that breakout point and the flag fails to develop then your orders for entry and stop loss are never triggered and there is zero risk. So even what could be considered to be a 'failed' trade actually carries no risk at all.

Summary

A comprehensive review of good, tradeable flag patterns and not so good ones to be avoided. Clear instructions on trade entry and stop loss points as well as why failure of a flag pattern does not mean a losing trade.