Consolidation chart patterns – Flags
A flag is a chart pattern that involves the interruption of a prevailing trend before resuming its course. It consist of prices trading between parallel trendlines. Eventually, the price of the security will breakout towards the prevailing trend, whether it is upwards or downwards.
Flags can further be classified into two types. Flags can be bullish or bearish flags. With regards to bullish flags, a breakout to the upside occurs because the prevailing trend is upwards. For a bearish flag, a breakout to the downside occurs because the prevailing trend is downwards.
How option traders can take advantage of flags?
In a bullish flags as the dominant trend resumes to the upside, option traders can initiate bullish positions on the underlying security. In a bearish flag as the dominant trend resumes to the downside, option traders can initiate bearish positions.
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