In our prior Blog post on Trading Flag Patterns, we covered the characteristics of flag patterns, how to detect and trade flag patterns using the Arps Flag indicator, and showed you that a confirmed breakout of a flag pattern is an excellent trade setup. As in many things, “timing is everything” in trading too. Locating flag patterns, breakouts, and “putting on the trade” can be tedious work, often requiring perfect timing. In this follow-up Blog we are going to show you how to overcome these obstacles in effectively trading flag pattern breakouts using two additional tools: the scanning version of the Arps Flag indicator and our new automated Flag strategy.
The Arps Flag Scanner
The most efficient way to locate flag patterns and breakouts is to use a scanner, containing a list of your favorite trading symbols or any equity and futures list you wish to screen, along with a flag scanning tool. Our unique and proprietary scanning version of the Arps Flag Indicator, designed exclusively for the TradeStation Radarscreen© and Multicharts© scanners, provides four columns of color-coded information, as described below and depicted in the screen shot that follows, for each symbol in which the Arps Flag indicator has identified a flag pattern. Cells are color-coded Green for Bull Flags and Red for Bear Flags.
Column 1- Bars Ago
This scanning cell, unique to Jan Arps’ Traders’ Toolbox, displays a running count of the number of bars since the occurrence of the flag pattern.
Column 2- Breakout Price
This column displays the price the stock must reach to confirm a breakout of the flag pattern.
Column 3- Target
This column displays the price at which the Profit Target will be achieved for the current flag pattern. The price will match the user-controlled input settings for the chart indicator on the size of flags and profitability targets you wish to trade.
Column 4- % to TGT
This column displays in percentage terms where current price is in relation to the distance from the breakout price to the target price. The Percent to Target column, “% TO TGT”, will be blank until a breakout has occurred. At the breakout price the % TO TGT cell will show 0%. When price reaches the target, the % TO TGT cell will show 100%. If price is half way to the target from the breakout price, for example, the cell will display 50%.
Below is an example of the Arps Flag Scanner indicator in action as installed on TradeStation’s Radarscreen© platform. To look for the most recent flag patterns, we double click on the header of the “Bars Ago” column and the symbol list is then sorted with the most recently-occurring flag patterns at the top. For a daily time frame, “0” Bars Ago indicates that a flag pattern has formed today, “1” Bars Ago would indicate a flag pattern formed yesterday, and so on. Similarly, if you were to format the Symbol column to display 5-minute data, “0” Bars Ago would indicate the current 5-minute bar and “1” Bars Ago would indicate that the flag pattern was identified on the previous 5-minute bar.
The colors of the cells are user-defined. For our example, magenta will signify the detection of a Bear flag pattern and light green will signify the detection of a Bull flag pattern. After a flag is detected, a price break through the breakout price level will turn the flag cells for that symbol to dark green to signify a Bull Flag breakout and red to signify a Bear Flag breakout.
How to Scan for Flag Patterns using the Arps Flag Scanner
As mentioned above, by double-clicking on the column header “Bars Ago”, the scanner will sort the most recently detected flag patterns to the top of the list in descending order, starting with those detected in the current bar, bar “0”. Using a linked chart window with the Arps Flag chart indicator applied, we then click on any symbol of interest in the scanner Symbol column for further analysis. In the screenshot below, we clicked on the symbol ADP, Automatic Data Processing, which formed a Bull flag pattern yesterday, 1 bar ago on our daily chart. We can continue scanning other symbols, set a Breakout Alert on this symbol or activate the Arps Flag Strategy to enter a trade automatically in the event a breakout occurs.
Recent flag breakouts that still offer excellent entry points are always of interest, so we scroll down and click on a well known stock, Cisco, which had a Bull flag breakout yesterday and the closing price is only 1% to the Profit Target. In the linked chart window below, we see that Cisco is breaking out of a congestion area, or base building period, and that the previous bull flag just barely fell short of the Profit Target. The flag has also nicely held all retracements. Based on the chart characteristics, this is a good trade candidate.
The Arps Flag Scanner, in addition to scanning for the most recent flag patterns and flag breakout signals, is useful in tracking the progression and maturity of flag pattern breakouts. In some cases, like with any strong continuation trend, you will want to participate in a breakout after the early stage. Below the linked window in our scanner highlights the symbol MO, Altria Corporation, that had a Bull flag breakout 9 bars, or 9 days ago, on our daily time frame and is 28% to the Target. With the smooth upward trend of this stock and room to go to achieve 100% of the Target, this is a good “jump on board” candidate.
To inspire confidence to trade flag breakouts, you can also sort on breakouts closest to the Profit Target. Below is a beautiful chart of EDP, Enterprise Products Partners, as price stretches as if drawn by a magnet to the Target line.
Taking a Position with the Arps Flag Strategy
Rather than having to wait and watch the screen for a Breakout Alert and enter the trade manually, we can activate the Arps Flag strategy in a new chart window on any flag pattern we are interested in trading if a Breakout occurs.
For a Bull flag pattern, the strategy upon activation enters three orders: a Buy Stop at the Breakout Price, a Sell Limit Order at the Profit Target Price, and a trailing stop using the Arps Trender.
Below is a chart of the Flag Strategy applied to symbol, COP, Conoco Phillips.
Inputs
The Flag Strategy has several Inputs that are user-controlled, so that you can customize the strategy to your specific trading style and risk tolerance.
1. The Arps Trender is used as a trailing stop to protect against unacceptable losses and to protect profit. The user can adjust the sensitivity settings to increase/decrease the “breathing room” of the stop.
2. The Profit Target default setting is set at 100% of the length of the Flagpole. Some breakouts go on to exceed the normal Profit Target and some fail to reach it. The user can adjust the Profit Target to less than 100% or more than 100% of the flagpole length, such as 120%.
An input is provided for you to adjust the Profit Target to less than 100% or more than 100% of the flagpole length, such as 120%, entered as 1.2 in the Input cell.
3. If, after an entry, the price breaks back into the flag, it will exit on an automatic stop on the other side of the flag.
4. If, before price reaches the profit target, a new flag in the same direction is detected, the new flag will be ignored unless the Strategy Properties input is set to allow more than one trade in the same direction. If, however, a breakout of a flag pointing in the opposite direction is detected while in a position, the strategy will reverse position.
In conclusion, to trade flag patterns the easy and efficient way, you will need three indicators: the Arps Bull and Bear Flag chart indicators, the Arps Flag Scanning tool, and the Arps Flag Strategy. We have combined these tools in a new Arps Flag toolset. For a limited time we are offering the Arps Flag toolset, a $900 value, for only $497. Click HERE to go directly to the online product page.
For questions, please send an email to info@janarps.com.
Until our next post,
Best,
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.
