30-50 Flags and Pennants Forex Trading Strategy

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30-50 Flags and Pennants Forex Trading Strategy

Pattern trading is one of the branches of trading that has withstood the test of time. And this isn’t only true about forex trading, but it encompasses almost all markets, whether it be stocks, bonds, commodities, etc. It also doesn’t only work on one holding period method, but it works across all timeframes, from scalpers, day traders, and even swing traders. There are small cap stocks day traders who have been successful scalping the market while there are also a lot of forex day and swing traders who have made consistent profits through pattern trading.

Flags and Pennants

Among the many basic patterns used in trading, there are a couple of continuation patterns that have a great degree of success and at the same time could be explained why price does it what it does with these patterns – the flags and the pennants. Below is a diagram of how they should look like.

Flags and pennants are both continuation patterns, which have a lot of similarities.

First, let’s discuss the flag pattern. The flag pattern is a pattern with a support and resistance that goes against an initial thrust. This support and resistance forms a channel which makes up the flag. Take note that flags usually go against a prior thrust. This thrust forms the pole of the flag. Being that the channel formed goes against a prior thrust, the flag pattern is an expansion phase followed by a retracement. As most retracements do during a trending market environment, it is usually followed by another expansion phase.

Next, the pennants. Pennants are almost the same as flags. Like the flag, it is also preceded by a thrust forming its pole. The difference is that instead of a channel, the supports and resistances tend to contract. In essence, pennants are the contraction and retracement phase after a rapid expansion. Now, the market usually moves in a sequence of expansions and contractions. As this theory would suggest, right after the pennant is formed, which is the contraction phase, another thrust could be expected.

The 30-50 EMA Dynamic Support and Resistance Area

Although flags and pennants are highly reliable, with a naked chart, it is often difficult to spot for an untrained eye. But there are ways to identify them a bit easier.

The 30 & 50 Exponential Moving Averages are great tools to help us identify these patterns. These EMAs are a pair of moving averages that work well as a support or resistance area. On a trending market environment, these are areas that we could expect price to retrace to and then bounce back. Given this characteristic of these 2 EMAs, we could use them as a dynamic support and resistance where we could expect retracements and contractions to occur during a trending market environment.

Trading Strategy Concept

This strategy is aimed at improving our skills in identifying flag and pennant patterns, which we often miss on a naked chart. By adding the 30-50 EMAs, we now have an area where we could anticipate these flags and pennants to take shape. If we spot one, then all we have to do is wait for the breakout, then enter the trade.

We will also be adding the 200 EMA as a filter to identify the main long-term trend direction. By trading according to the direction of the main trend, we improve our chances knowing that we have lesser headwinds in front of us.

Timeframe: 15-minute chart and above

Currency Pair: any

Session: any

Buy (Long) Trade Setup

Entry

  • Price should be above the 200 EMA
  • The 30 EMA (gold) should be above the 50 EMA (green), while both are above the 200 EMA (brown)
  • A flag or a pennant should be identifiable
  • Enter a buy market order on the close of the candle as soon as the resistance on the pattern is broken.

Stop Loss

  • Set the stop loss at the minor swing low below the entry candle

Take Profit

  • Set the take profit at the high on the thrust or pole of the pattern

Sell (Short) Trade Setup

Entry

  • Price should be below the 200 EMA
  • The 30 EMA (gold) should be below the 50 EMA (green), while both are below the 200 EMA (brown)
  • A flag or a pennant should be identifiable
  • Enter a sell market order on the close of the candle as soon as the support on the pattern is broken.

Stop Loss

  • Set the stop loss at the minor swing high above the entry candle

Take Profit

  • Set the take profit at the low on the thrust or pole of the pattern

Conclusion

This is a working strategy. What you could do with this strategy is to cycle through all the currency pairs that you trade. I would suggest that you look at everything except the exotics. These patterns do work on the exotics, but because some currencies are manipulated by the central banks, the pattern could be voided. As you look at all the pairs that you are trading, cycle through the timeframes until you find a viable pattern. Then, create a shortlist or watchlist of the currency pairs and timeframes where you found a pattern, then keep a close watch on them until the breakout occurs.

One thing to consider though when taking a trade is the reward-risk ratio. There will be setups that will have low reward-risk ratios if you are targeting the highs or lows of the pole. Some traders would rather aim for the same length as the pole. You could do this if you feel a bit aggressive, although as a warning, the lows or highs of the pole are already in itself a horizontal support or resistance.

Other traders on the other hand opt not to take trades if the reward-risk ratios are low based on the target take profits. Some traders would opt to take trades above 1.5:1 ratio, while others would only take 4:1 reward-risk ratios. The latter is quite difficult to accomplish but could be done if you would go down a timeframe lower for a more surgical yet riskier entry.

This strategy is one of those strategies that would work out of the box but requires a lot of practice and screen time. This is because you would have to learn to identify the patterns, but not only that, you would also have to identify the right supports and resistances and the right breakout candles.

Practice this strategy and you could make money out of it.

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