The below example is of the Dow in June where you have a head and shoulders pattern that has broken to the downside.From the top of the pattern at 17914 and goes down to 17847. The flag retraces back up to 17885before breaking back through the support at 17868 where the short position would be entered. The subsequent drop of 68 pips drop matches almost exactly the length of the first drop of 67 where a take profit at 67 would have been triggered.
There are many different patterns that traders follow to help time entries and exits. The flag pattern is one that tends to catch many traders interest because they can provide explosive moves.
The pattern makes up 3 separate stages
To start his process, you will need to identify and product that is in a strong upwards or downwards trend (Flag Pole). Through the duration of the uptrend, the prices need to consolidate mid-way through. This will then become the flag of the pattern. During this consolidation, you will generally find that the flag portion of the pattern tends to gently slope in the direction of the pole.
Due to this, the consolidation will retrace a small part of the initial uptrend. If this retracement is greater than 50% it will be a good indication that the pattern is false. Ideally, you will want the retracement to be under 35%. Since this is a multi-staged pattern you will look for the price to break along the direction of the initial pole with a length equal to the size of the flag pole.
On the below chart you can see a strong starting trend creating the first pole setting up a bullish pattern. This is then followed by a pullback within a flag pattern. There is a pullback of 40% which is above the recommended 35% but within the 50% limit. The pattern then has one false break out followed shortly by the main break above the resistance line. The second uptrend continues toroughly100% of the original pole.