This is the first post in an educational series, demonstrating the tools in the CIG (Complete Idiot’s Guide) Technical Analysis tool kit, to help you become a more effective and successful trader. Now on to our first post:
Who says classic price patterns no longer work in today’s markets where so called “black boxes” and computerized strategies often drive a significant percentage of the trading action? The primary market forces of supply and demand and the underlying fear and greed of market participants, including those that flip the switches on the computerized trading, still make price patterns as valid today as they were 30-50 years ago.
One of the key decisions in trading that can cause never-ending consternation is where we should place our stop and what our profit target should be. One of the nice features of many price patterns is that they suggest stop and target levels for you. We all want to make trading easier…buy here and sell there. Price patterns are perfect for the signal-inclined trader. The challenge in trading price patterns, though, is to identify the pattern in real-time. The Arps price pattern tools do just that. They are designed to do all the heavy lifting for the trader.
Let’s examine a price pattern that occurs frequently in trending markets — the Flag Pattern. For those of you who are not familiar with the flag pattern, it is a form of pullback pattern in an existing trend. If you like to trade breakouts, as many traders do, then you will love trading the breakouts from flag patterns.
So what is a flag pattern? As shown in the diagram below, after a steep rise or fall the price will often exhibit a consolidation pullback before continuing in the direction of the prior trending move. The two moves together, the trend thrust and the trend pullback, resemble a flag with the “pole” being the trend thrust and with the top and bottom borders of the pullback forming a flag-shaped consolidation area. The flagpole rarely is straight up nor is the flag portion horizontal. The top and bottom borders of the flag itself will slope away from the price high at the top of the pole. The value of the flag pattern lies in the fact that if price closes above the flag pattern, a second major move frequently occurs whose length is approximately equal to the length of the initial trend thrust (pole)…thus resulting in the potential for a handsome gain. A variation on the flag pattern is the pennant pattern, where the flag is in the shape of a sideways triangle. Both can be traded in the same manner.
This is where the Arps Flag Pattern indicator comes into play. This sophisticated pattern recognition tool will do the “heavy lifting” for you: it will identify the flag pattern, plot a breakout (entry) signal dot in real-time when a valid breakout of the pattern has occurred, and plot a profit target line (exit) on confirmed breakouts.
Here’s how we trade with the Arps Flag Pattern indicator:
We apply the Arps Bull Flag or Bear Flag indicators to our chart to look for flag patterns. The indicator will display a flag pattern and generate an optional alert signal once the pole and the flag pattern have formed. The shape of the top and bottom of the flag will adjust as new bars are added in real time. The Breakout Dot and Target Line are automatically plotted once a breakout of the flag has occurred. Of course, not all flag patterns will have a breakout. Sometimes the price will break out of the bottom of the flag, thus invalidating the pattern. Since a valid flag trade is always a breakout trade, we only take a trade once the alert is triggered that price has broken out above the top of the flag.
For example, below is a daily chart on CRM (Salesforce.com, a NYSE listed stock). The Arps Bull Flag tool identified a flag pattern setup on July 19th and automatically drew the pole and flag lines. Two bars later the price broke out of the flag pattern and the Breakout Signal was plotted in real-time at a price of 95.39, along with a projected price target at 102.27. Seven bars later the Profit Target was achieved for a nice gain.
Now for a recent example of a bear flag, we have below two consecutive bear flags on a daily chart of WDC (Western Digital, a NYSE listed stock). A bear flag is simply an upside-down bull flag. Whereas we buy breakouts from a bull flag, we sell breakouts from a bear flag.
Two nice short trades occur on this chart: the first Breakout Signal came at a price of 39.00 with a fulfilled Target price of 31.10. On the second bear flag, price fell sharply after a Breakout Signal at 31.02 and hit the Target line at 26.37 in seven days. As of this writing, the stock is still looking for a bottom.
As you can see, once a Flag Pattern is confirmed with a Breakout above (Bull Flag) or below (Bear Flag) the flag formation, you have a low-risk, high-return trade setup with a defined target.
We hope you found this blog on flags informative. The Arps Flag Pattern indicator for charting is available for the TradeStation, eSignal, and Multicharts platforms. For swing traders who follow a large list of stocks, we also offer scanning versions of the flag pattern for the TradeStation and Multicharts platforms. For a limited time, you can purchase the indicator at a special discount as part of our custom CIG Technical Analysis tool sets. Basically, for less than the normal retail price of the Arps Flag indicator alone, you also receive two additional tools of your choice. Click HERE to go directly to the website CIG custom tool set product page. Finally, we will soon make available an automated strategy that will enter a position on a stop at the breakout dot and exit at the profit target. For those interested once released, or for more information about the Arps Flag Pattern tools, forward us an email at info@janarps.com.
We hope you found this blog informative.
Until our next Post in the CIG Technical Analysis tool series,
Trade Well,
Jan Arps’ Traders’ Toolbox
DISCLOSURE
Jan Arps’ Traders’ Toolbox is not an investment advisory service, nor a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities customers should buy or sell for themselves. Customers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented in this letter are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The author and affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
