The flag pattern is an important chart pattern in forex trading. You should use this pattern as part of your trading strategy. There are two types of flag patterns. Bull flag, which occurs in an uptrend. The bear flag is spotted inside a downtrend.
The flag pattern consists of a flag pole, an area of consolidation, which resembles a flag, and finally a break out in the direction of the trend. In an uptrend, at some point, buyers are exhausted, and the market goes into consolidation. This area of consolidation looks like a flag, hence the name, flag pattern. After this period, the market once again gains momentum, and breaks out in the direction of the uptrend. This pattern is also called as a bull flag.
In case of a downtrend, when sellers are exhausted, the markets goes into consolidation mode. After this period of consolidation, the market gains momentum, and breaks out to the downside. This is also called a bear flag.