Flag and Pennant: A Pause Inside a Move
Flags and pennants are short pauses after a sharp move. Both mean the same thing: the market has not reversed, it has caught its breath. The only difference between them is the shape of the correction.
Flag versus pennant
A flag is a correction inside a narrow sloping channel against the direction of the move. A pennant is a compression into a small symmetrical triangle. What they share matters more than what separates them: both follow a sharp impulse, both are short, and neither takes back a significant portion of the preceding move. A correction that drags on or runs deep is no longer a flag but a change in the market's character.
Why a pause usually ends in continuation
After a strong impulse some participants take profit, which creates the pullback. But those who missed the move are waiting for exactly that opportunity. While their demand outweighs the profit-taking, the correction stays shallow and ends in continuation. Once the pullback becomes deep, the balance has changed and the figure can no longer be read as a pause.
Entry, stop and a rough target
Entry on the exit from the figure in the direction of the preceding impulse, with the stop behind the opposite boundary. The target is usually taken as the length of the impulse before the flag, projected from the exit. That is a crude measure: it assumes the second wave repeats the first, which is not obliged to happen.
Telling a flag from a reversal
By depth and by time. A flag that takes back more than half the impulse has stopped being a flag. One that lasts longer than the impulse itself has too. A useful reference is structure: while the pullback has not broken the previous significant extreme in the direction of the move, continuation remains the base case.
We deliberately publish no measurement for this figure. Its marking cannot be formalised unambiguously, and any detection algorithm would reflect our arbitrary thresholds rather than a property of the market. Where the definition is strict — as with the inside bar or engulfing — we test the pattern on data and publish the result. Here it is more honest to say there is nothing to test.
This material is educational and is not individual investment advice. Trading forex carries the risk of losing capital.
Frequently asked questions
What is the difference between a flag and a pennant?
The shape of the correction: a flag runs in a sloping channel against the move, a pennant compresses into a small symmetrical triangle. They are traded identically, as pauses within an impulse.
How deep can a flag retrace?
There is no hard threshold, but half of the preceding impulse is a useful reference. A deeper pullback means the balance of forces has changed and the figure can no longer be treated as a pause.
Where does the stop go on a flag trade?
Behind the opposite boundary of the figure. Flags are compact, so the stop is usually short — one of the few figures with a favourable risk-to-potential ratio.
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