The flag formation provides signals for direction and price objective. This formation represents a brief consolidation period within a solid and steep upward or downward trend. The consolidation itself is bordered by a support line and a resistance line, which are parallel to each other or very mildly converging, making it look like a flag (parallelogram) and tends to be sloped in the opposite direction from the slope of the original trend, or is simply flat.
The previous sharp trend is resembles a flagpole. If the original trend is going down, the formation is called a bearish flag. As the Figure shows, the original trend is sharply down. The flagpole is measured between points A and B.
The consolidation period occurs between the support line B to E and the resistance line C to D. When the price penetrates the support line at point E, the trend resumes its fall, with the price objective F, measured from E.
The price target is of about equal amplitude with the flagpole's length (A to B), measured from the breakout point through the support line (B to E.)
In the numerical example, the height of the flagpole is measured as the difference between 140.00 and 120.00 equals 2000 pips. Once the support line is broken at 125.00, the price target is 105.00, as 2000 pips from 125.00.
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