Chart Patterns II: Bull Flags, Bear Pennants & Triangles

Continuation patterns are built on a simple psychological sequence: **Surge -> Consolidation -> Surge**. Let's break down the three most reliable structures.

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**1. THE BULL FLAG & BEAR FLAG (The Profit Taking)**

This is the bread and butter of momentum traders.

**The Anatomy of a Bull Flag:**
1. **The Pole:** A sharp, aggressive move UP. This represents institutional accumulation.
2. **The Flag:** A slow, drifting channel DOWN.
* *Key Feature:* The channel should slope *against* the trend. If the trend is up, the flag points down.
* *Psychology:* Why is it drifting down? Because early buyers are taking profits. However, the sell-off is weak and overlapping, meaning there are no aggressive sellers entering the market.
3. **The Breakout:** Price explodes out of the top of the channel, resuming the uptrend.

**The Anatomy of a Bear Flag:**
1. **The Pole:** A sharp crash DOWN.
2. **The Flag:** A slow, drifting channel UP. (Sellers taking profit, weak buyers trying to pick a bottom).
3. **The Breakout:** Price crashes through the bottom of the channel.

**Execution Strategy:**
* **Entry:** Do not buy *in* the flag (it might keep drifting lower). Buy the **Breakout** of the upper trendline of the flag.
* **Stop Loss:** Below the lowest point of the flag structure.
* **Target:** Measure the height of the Pole. Add that distance to the breakout point. (Flags fly at half-mast; the pole projects the next leg).

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**2. THE PENNANT (The Coiled Spring)**

A Pennant is similar to a flag, but instead of a rectangular channel, the price action converges into a small triangle.

**The Anatomy:**
1. **The Pole:** Sharp, vertical move.
2. **The Pennant:** Price consolidates sideways, making Lower Highs AND Higher Lows. It gets tighter and tighter.
3. **Volume Profile (Crucial):** Volume must **die** during the pennant formation. It should look like the market has gone to sleep. This indicates that supply and demand are reaching equilibrium.
4. **The Breakout:** Volume explodes as price breaches the trendline.

**Psychology:**
The market is 'catching its breath.' Neither buyers nor sellers want to push price until new orders arrive. Once the orders arrive, the stored energy is released violently in the direction of the original trend.

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**3. THE ASCENDING TRIANGLE (The Bullish Siege)**

Imagine an army sieging a castle wall. They attack the wall, get repelled, regroup, and attack again—but this time they don't retreat as far back.

**The Anatomy:**
1. **Flat Top (Resistance):** Sellers are defending a specific price level (e.g., $100). Every time price hits $100, it drops.
2. **Rising Bottom (Support):** Buyers are getting aggressive. Every time price drops, they step in sooner.
* Low 1: $90.
* Low 2: $92.
* Low 3: $95.
3. **The Squeeze:** Price is being squeezed against the $100 ceiling.

**Psychology:**
The sellers at $100 are running out of ammo. The buyers are willing to pay higher and higher prices. Eventually, the supply at $100 is absorbed, and price rips through the ceiling.

**The Trap:**
Do not short the top of an Ascending Triangle just because it is 'Resistance.' You are stepping in front of a steamroller.

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**4. THE DESCENDING TRIANGLE (The Bearish Drain)**

This is the inverse of the Ascending Triangle.

**The Anatomy:**
1. **Flat Bottom (Support):** Buyers are defending a floor (e.g., $50).
2. **Falling Top (Resistance):** Sellers are getting aggressive, pushing price down from lower and lower peaks.
3. **The Break:** The floor gives way.

**Psychology:**
Buyers are exhausted. They are only willing to buy at a specific low price. Sellers, however, are desperate to get out and are lowering their ask prices constantly. Once the buyers at the floor are filled, there is zero support left below.

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**5. THE SYMMETRICAL TRIANGLE (The Wildcard)**

In this pattern, both trendlines slope towards each other.
* Lower Highs (Sellers aggressive).
* Higher Lows (Buyers aggressive).

**The Direction:**
Unlike Ascending/Descending triangles which have a directional bias, the Symmetrical Triangle is neutral.
* *However*, it is usually a **Continuation Pattern**. If the prior trend was UP, the breakout is 70% likely to be UP.

**The Strategy:**
Do not predict the direction. Place 'Bracket Orders' (A Buy Stop above the top line and a Sell Stop below the bottom line). Let the market tell you which way it wants to go.

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**6. VOLUME: THE TRUTH SERUM**

We cannot discuss patterns without discussing Volume.

* **During the Pattern:** Volume should **Decrease**. This confirms it is a consolidation phase.
* **At the Breakout:** Volume should **Increase**.
* *Scenario:* Price breaks the top of a Bull Flag, but Volume is low.
* *Verdict:* **False Breakout.** The smart money is not participating. Expect price to reverse back into the flag.

**Institutional Insight:**
If you don't have access to real volume (Forex is decentralized), look at the **Size of the Candle**. A breakout candle should be a large, solid 'Marubozu'. If the breakout candle is a small 'Spinning Top', do not trust it.

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**7. MEASURED MOVES: KNOWING WHEN TO EXIT**

Greed kills trades. Chart patterns give you a mathematical reason to exit.

**The Flag/Pennant Projection:**
1. Measure the Pole (The impulse move leading into the flag). Let's say it was 50 pips.
2. Wait for the Breakout.
3. Add 50 pips to the Breakout price.
4. This is your Target.

**The Triangle Projection:**
1. Measure the widest part of the triangle (The base). Let's say it is 30 pips wide.
2. Add/Subtract 30 pips from the breakout point.

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**8. CONTEXT: LOCATION MATTERS**

A Bull Flag is only a Bull Flag if it appears after a sharp move up.

* **Scenario:** The market has been moving sideways for 3 days. A small channel forms.
* **Verdict:** This is not a flag. This is just more choppy noise.

**Rule:** No Pole, No Flag. You need the momentum injection first.

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**CONCLUSION**

Continuation patterns are the safest patterns to trade because you are not trying to be a hero. You are not trying to stop a falling knife (Reversals). You are simply waiting for the market to take a breath so you can join the existing trend.

* **Bull Flag:** Profit taking in an uptrend.
* **Ascending Triangle:** Buyers breaking down a wall.
* **Pennant:** Energy coiling for a release.

By mastering these structures, you stop chasing price. You wait for the structure to form, you set your trap (Buy Stop at the breakout level), and you let the market trigger you in.

In the next lesson, we will introduce the mathematical ratios that govern these movements: **Fibonacci Retracement: Finding the 'Golden Ratio' Entries**.