Thursday, October 13, 2011
A final flag represents an area of high probability reversal. A classic final flag is a horizontal flag made of overlapping trend bars. These bars are likely to be large when a bear trend is ending (b18-23) but may be made of smaller bars when a bull trend is ending (b65-67). If the bars are not trend bars, a continuation is more likely than a reversal.
A normal flag moves counter to the direction of the main trend (b32-38, b53-b60) and represents early traders exiting, counter-trend traders being trapped in and new traders moving in, taking the price to a new extreme. The deeper the pullback, the more likely the with-trend pullback entry will succeed.
A horizontal flag on the other hand does not represent the early traders exiting. Their target is very close and they are holding to exit on the next push. Counter-trend traders do not get trapped and new traders are unlikely to enter on a very shallow pullback.
A horizontal flag on the third push is very likely to be a final flag and you should look for favorable entries. If the risk is too large as in b23, its best to wait for a second entry (b38) or enter on the first pullback after the trend has reversed. This is because there is a rather high risk of being trapped when then the entry is counter-trend and the risk is large (b19 buyers).
If the flag is made of smaller bars (b65-67), an entry after a with trend break and failure is preferable to avoid being trapped (shorts below b66 were stopped out). An ii variant such as b69,70 makes an excellent FF entry, especially when overshooting a TCL.