Trade Flag Patterns with Illuminati-Trader

Did you know you can use Illuminati Trader not just to trade straddles and strangles around earnings season, but also to trade stocks up or down at any time of the year! This means you can use the site to trade stocks with your broker and, for UK traders, even trade through your spread betting account! This is part of the incredible value of Illuminati Trader and it’s so easy to do using TradeFinder. Let me show you how:

All you have to do is check the box within TradeFinder to only includeconsolidation chart patterns.  Leave everything else unchecked.  Tip:you may find more consolidating chart patterns by changing theexpiration month. 

TradeFinder Flag check.jpg

 And then press the Search button to get a list of flag patterns.

TF Flag Results Torn_1.jpg

Flag Patterns

Flag patterns are part of a family of chart patterns called“consolidating chart patterns”.  These are my absolute favouritepatterns and form the basis of my trading life. 

A flag pattern comprises of a thrusting surge (the flagpole) whichthen consolidates to form the actual flag shape.  The thrust can occurin either an upwards (bullish) or downwards (bearish) direction. 

A flag pattern can occur during a persistent and dominant trend oras a stock emerges out of rangebound price action.  I tend to prefer tosee flag patterns during a nicely established trend. 

The flag shape itself consists of the price pattern rebounding offtwo parallel interim trendlines before breaking out in the direction ofthe dominant trend.

Bull Flag:

With bull flags, our trade entry is a buy order and our stop loss is a sell order.  We anticipate a rising stock price. 

 Bull Flag.jpg

So here we can see that we have the makings of a trading plan: 

We enter our buy order at either point A or B

Point A is at the level of the top of the flag.  As such it is themost conservative entry point, because it is where the stock is makingnew highs.  You must make sure that volume is increasing as the newhigh is made.  Increasing volume means there is conviction behind themove, which makes it more likely to be sustainable.

Point B is where the stock breaks out of the flag itself.  This ismore aggressive than Point A, and again requires increasing tradingvolume to demonstrate conviction in the move. 

If the entry is activated then we need a stop loss.  Point C is thelevel where, if we’re already in the trade, we’d exit with a smallloss. 

This is your basic trading plan for a Bull Flag, within the context of an upward trend. 


Bear Flag:

With bear flags, our entry is a sell (short) order and our stop lossis a buy order to close the position.  We anticipate a falling stockprice. 

Bear Flag.jpg

We enter our sell (short) order at either point A or B. 

Point A is at the level of the bottom of the flag.  As such it isthe most conservative entry point, because it is where the stock ismaking new lows.  You must make sure that volume is increasing as thenew low is made.  Increasing volume means there is conviction behindthe move, which makes it more likely to be sustainable.

Point B is where the stock breaks out of the flag itself.  This ismore aggressive than Point A, and again requires increasing tradingvolume to demonstrate conviction in the move. 

If the entry is activated then we need a stop loss.  Point C is thelevel where, if we’re already in the trade, we’d exit with a smallloss. 

This is your basic trading plan for a Bear Flag, within the context of a downward trend. 

Let’s look at an example of each:

Chart: Bull Flag

Bull Flag Chart.jpg


Chart: Bear Flag

 Bear Flag Chart.jpg

 

Flags within the context of a Trend

Now, what if I then said to you, how about finding flags within thecontext of a trend?  That means you can play the flag, knowing that thetrend is backing you up.  Now we’re beginning to add some backbone toour trading plan! 

All we have to do is draw a trendline to see if the flag is forming within the context of a trend. 

In the above two examples we can see that this is the case.  TheBull Flag is within the context of a 2-month up trend and the Bear Flagis within the context of a 1-month down trend. 

Chart: Bull Flag resolved to the upside

Bull Flag Resolved.jpg


Chart: Bear Flag resolved to the downside

Bear Flag Resolved.jpg

If the trendlines are broken then we would exit the long (Bull Flag)or short (Bear Flag) positions.  Similarly, to enter into the longposition, the price would need to rise above the top of the Bull Flagor break up through the upper flag trendline. 

To enter the short position the price would need to fall below thebottom of the Bear Flag or break down through the lower flagtrendline. 

Do you now see how we can make simple rules regarding the trend and flag patterns in order to create a cohesive trading plan? 

When a stock is trending, it typically does so in steps…or flags. Therefore, by identifying trending stocks, we’re de-facto going to findflags too. 

The key now is how to find flag patterns at will.  The problem manypeople have with trading a winning position is that they’re scared theywon’t find one ever again.  Therefore they stay in too long andeventually they end up forfeiting their gains.  Does that sound at allfamiliar?! 

Well the good news is that we have developed some sophisticated algorithms that find bull and bear flags.

Finding Flag Patterns

Now you can see the benefits of trading with the trend and usingflag patterns to determine you entry and exit points, let’s identifyhow to find them. 

We obviously can’t disclose the algorithms we created to find thesetypes of stocks, but I can tell you that they are neither based onfundamental criteria nor moving averages of price action. 

What I can tell you is that our algorithms discover consolidatingstocks relentlessly, every day, every week, every month and everyyear.  All you need to do is choose the one you like the most.  Choosethe best flag pattern, or simply play the trendline itself.  It’s up toyou. 

When the markets are generally trending down, there are likely to befew up-trending stocks and vice versa.  Typically, whatever the generaltrend of the market, you want to trade in the same direction until thetrendline is broken.  By trading in this way, you’re being responsiveto a potential change in direction, but you’re not trading so tightthat you’d be whipsawed out of a profitable position. 

 
Trade Entry

When you enter your buy order for a Bull Flag, your entry will be slightly above the top of the flag and therefore will be a Buy Stop Order to Open.  If you want to avoid a scenario where the stock gaps up and triggers your order at a higher price, you would enter a Buy Stop Limit Order to Open.  Different brokers will have slightly different terminologies but they’ll all understand that. 

When you enter your sell order for a Bear Flag, your entry will beslightly below the bottom of the flag and therefore will be a Sell Stop Order to Open.  If you want to avoid a scenario where the stock gaps down and triggers your order at a lower price, you would enter a Sell Stop Limit Order to Open.  Again, different brokers will have slightly different terminologies but they’ll all understand that. 

Intelligent Stops

On the subject of stop placement, I’ve heard many so-called guruswho spout the expression “Use tight stops”.  Tight stops mean, in thereal world, that you’ll be stopped out because your order can be seenin the market.  Stop orders need to be placed intelligently, not tootightly.  If your sell stop is only a cent below you buy order, thenit’s highly likely you’ll be stopped out, hence making both a loss onthe stock and commissions. 

When you see a Bull Flag pattern you’ll typically want to place yourstop below the actual flag pattern by up to 25c depending on the stockprice.  The key is not to place it where everyone else is expecting it,ie right at the base of the flag itself.  Best a bit below that. 

The exact opposite applies to Bear Flags.  When you see a Bear Flagpattern you’ll typically want to place your stop above the actual flagpattern by up to 25c depending on the stock price.  Again, give it abit of space so it’s not in the most obvious place with all the othersstops. 

 

Scaling Your Profits

Now, what if your Bull Flag stock breaks upwards into new highsafter you’ve bought it?  Well that’s great news, you’re in profit.  Agood rule of thumb is to take the height of the preceding flag pole,halve it and project that length upwards for the current move.  That’sa good target at which to take half of your profits.  For the remaining50% you should be able to draw a trendline going upwards as the stockrises.  At some stage that trendline is going to be broken, even ifyou’re adjusting its angle from day to day, and at that point you’lltake profits for that remaining 50%.  In this way, you’ll never beguilty of not taking profits, and that’s what this business is allabout. 

And what if  your Bear Flag stock breaks downwards to new lows afteryou’ve shorted it?  Well that’s great news too as, again, you’re inprofit.  Take the height of the preceding flag pole, halve it andproject that length downwards for the current move.  That’s a goodtarget at which to take half of your profits.  For the remaining 50%you should be able to draw a trendline going down as the stockdeclines.  At some stage that trendline is going to be broken, even ifyou’re adjusting its angle from day to day, and at that point you’lltake profits for that remaining 50%. 

History demonstrates that trading with the trend together with specificchart patterns, yields investors the highest returns.  Now it’s yourturn to take this opportunity and start trading flags and see youraccount grow.  All you have to do is click for consolidating chartpatterns on the TradeFinder and now you have another way of using thepowerful tools within Illuminati-Trader.

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