A flag is a brief, orderly pause after a sharp move — the market catching its breath before continuing in the same direction. It has two parts: the pole (the strong impulsive move) and the flag (a small, counter-trend consolidation that drifts against the pole on lighter volume).
Bull flag
After a sharp rally (the pole), price drifts down or sideways in a tight channel on declining volume (the flag), then breaks out upward to resume the advance. The pullback is shallow and controlled — profit-taking, not a reversal. A breakout above the flag on renewed volume is the trigger.
Bear flag
The mirror in downtrends: a sharp drop, then a weak upward drift, then a break lower. The key tell is that the flag's counter-trend move is lazy — small candles, fading volume — which signals the pause is consolidation, not a genuine turn.
Why it works and how to size it
Flags reflect a trend pausing while late participants enter and early ones take partial profit; when that resolves, the trend resumes. The measured target projects the pole's height from the breakout point (covered in a later lesson). Beware flags that are too deep or too long — a 'flag' that retraces most of the pole is often a reversal in disguise.