Flags and pennants are two similar consolidation patterns which can signal a continuation of the previous trend. They are formed when a steep trend is followed by a generally sideways movement. Once a breakout occurs, quite often the resulting movement continues the previous trend just as steeply.
The flag pattern is formed when the price moves between two parallel trendlines after a steep trend. The flags trendlines are usually not horizontal and are usually in the opposite direction of the initial trend. The signal to buy or sell comes when the price breaks out of the flags channel in the direction of the initial trend.
Pennants are very similar to flags however pennants differ in shape in that the trendlines of the pennant converge into a symmetrical triangle rather than remain parallel such as in a flag pattern.
It is essential that the movement prior to the flag or pennant is very steep (almost vertical) for a flag pattern to be identified.
Flags or pennants can occur during a downtrend or an uptrend.
Like other chart patterns discussed previously, the target of the breakout should be set around the same size as the size of the prior movement before the flag or pennant pattern.