In “technical analysis of future markets: theory and practice”, J. Murphy characterizes these figures of the trend continuation in the following way. The models “flag” and ” pennant” correspond to brief pauses in the tendency developing dynamically. In the chart, a steep (and almost straight) line that describes the price movement must precede formation of these models. Such models designate the markets that in their development upwards/downwards, so to say, “outrun themselves”. That is, they must ” stop and take rest” for a while – before the continuation of the movement towards the previous direction.
The “flag” and ” pennant” belong to the group of the most reliable patterns of the tendency continuation. Within the framework of these models, the radical turn in the tendency occurs seldom. Take a look at Charts 6.7a and 6.7b. These examples depict such a near resemblance between these patterns. First, the attention must be paid to the steep rise in prices in combination with a great volume of trade. This situation precedes the coming into existence of the pattern in question. Besides, important is a drastic decrease in the market activities during the course of the pattern development. It is a signal of the market entrance into the phase of consolidation. Further the activity vigorously increases under the condition of the breaking through the trend upper bound (line).
Chart 6.7a represents an example of the “bull” flag. As a rule, models of this type come into existence after a rush movement in prices. Their formation testifies a brief pause in the course of the tendency development. The “flag” is slanted towards the direction opposite to that of the price tendency. During the flag formation, the trading volume is diminishing. Further, after the breaking through the trend line, the trading volume increases. As a rule, a model of this kind appears in the midst of (half way along) the movement in prices.
PLOTTING “FLAG” and “PENNANT” PATTERNS
In its essence, plotting of these two models is almost identical. The “flag” is similar to a parallelogram or rectangle. Such figures are restricted within the trend two parallel lines, their slant being directed against the prevalent tendency. In the case of the descending tendency, the “flag” must be directed slightly upwards.
The trend two converging lines indicate the model of “pennant”. Besides, its location is more close to the strictly-horizontal position. The “pennant” bears a resemblance to a small symmetrical triangle. Both the patterns are being formed in parallel to the substantial decrease in the trading volume, which occurs gradually.
Chart 6.7b. The “bull” pennant is similar to a small symmetrical triangle. However, its duration does not exceed 3 weeks. This model comes into existence under the condition of a small trading volume. After coming to the end of this pattern, the movement in prices must reiterate (repeat) the distance, passed by the prices before the model formation.
TECHNIQUE of PROCESSING “FLAG“ and “PENNANT” PATTERNS
In practice, the means of measuring both the models are rather similar. As one can say figuratively, “flag “ and “pennant” patterns rise from the flag stock – up to the half of the mast length. The concept of the “flag stock” implies a steep rise/decrease in prices that precedes formation of such patterns. The “half of the mast length” implies that usually such mini-models of the tendency continuation come into existence approximately in the middle of the movement. In general, after the tendency recommencement the movement in prices covers the distance equal to the “flag stock” length or extension of the price course that precedes the pattern formation.
Chart 6.7c. “Flags “ and “pennants“ are typical of the markets developing dynamically. Both the models depict brief pauses in the course of the tendency development. The reader should pay attention to the number of flags and pennants that accompany rise in prices of deals made with EUR/USD.
Chart 6.7d. The first model on the left can be either a symmetrical triangle or a pennon. The second configuration, most likely, is an ascending flag. Under the condition of the descending tendency, duration of these patterns seldom exceed a fortnight.
Conclusions. The most important specificities inherent in the “flag “ and “pennant” patterns.
1. Drastic movement in prices precedes the appearance of such patterns. This movement has the form of almost a straight line, accompanied by a substantial trading volume.
2. Further, there occurs a pause. Under the condition of the trading volume not large, prices hold on approximately at the same level during 1-3 weeks.
3. The tendency recommences when the trading activity steeply increases.
4. Both the patterns are formed approximately in the middle of the movement in prices.
5. In its form, the pennant resembles a not large horizontally-symmetrical triangle.
6. The flag resembles a not large parallelogram, slanted towards the direction opposite to that of the dominant tendency movement.
7. These patterns become formed more quickly under the condition of the descending tendency.
8. Very often both the models come into existence in future markets.
The PATTERN of “WEDGE“
According to J. Murphy, the pattern of wedge in its form and duration of the formation resembles a symmetrical triangle. Analogously to the model of a symmetrical triangle, the wedge is easily recognizable by two trend lines converging in the apex. As a rule, the wedge becomes formed during 1-3 months. This fact permits naming it the intermediate-type pattern.
A substantial inclination (slope) – upwards or downwards - is inherent in the pattern of wedge. Analogously to the flag, the wedge is inclined against the direction of the prevailing tendency movement. That is, the downward-directed wedge is regarded as the “bull” pattern. Respectively, the upward-directed wedge is considered the “bear”-type pattern. The reader should pay attention to the following fact. In Chart 6.8a, the “bull” wedge, inclined downwards, is located between two converging trend lines.
In the case of the descending tendency, the trend converging lines are clearly directed upward (see Chart 6.8b).
In Chart 6.8a, one can see an example of the downward-directed “bull” wedge. The pattern is formed by two converging trend lines. It is directed downwards – in the direction opposite to that of the prevailing tendency development. As a rule, a wedge of this kind belongs to the “bull-type” pattern.
In Chart 6.8b, one can see an example of the “bear” wedge. The latter must be directed upwards – against the dominant descending tendency direction.
Chart 6.8c depicts the energy carriers CPB index of future prices. There are 4 different models.
· The first one (above on the left) is the “triangle consolidation” under the condition of the ascending tendency.
· The second pattern (August - September) corresponds to the “bear” wedge, directed upwards.
· The third pattern presents the “bear” pennant (October and November).
· The fourth pattern, which corresponds to the period within November – December, is a flag, directed upwards.
WEDGES as TURNING- POINTS PATTERNS at the APEX of the MARKET and in its BOTTOM.
Chart 6.8d gives a striking example of the upward-directed wedge. In the given case, the pattern depicts activity in the market of mazut in the period from October till November. The trend lines are converging and directed upwards. Movement in the market, which has happened from the end of November till the beginning of December, resembles a rising flag. The reader should pay attention to the resemblance between the given chart and the one that depicts the price index for energy carriers CPB in the previous example.
According to J. Murphy, most often wedges are formed in the course of the present tendency development. As a rule, wedges play the role of patterns of the trend continuation. Wedges can also be formed at the apex of the market – or in the basis of it. This is a signal of the forthcoming U-turn in the tendency. However, this happens rather rarely. Sometimes one can find a perfectly formed wedge, directed upwards, at the last stage in the ascending tendency development.
This pattern can be formed in the middle of the price movement segment or at the end of it. Independently of the place of formation, one must always keep in mind that the upward-directed wedge corresponds to the “bear” pattern. Respectively, the downward-directed wedge corresponds to the “bull” pattern.
Before the breaking-through, this pattern usually has time to cover 2/3 of the distance to its apex. Sometimes it even reaches this peak. The ability of passing through the whole way up to the apex also indicates the difference between this model and a symmetrical triangle.
In “technical analysis. The total course”, J. Schwager has made an important contribution to this subject. That is, he has enumerated criteria of the true “flags and pennants” patterns as figures of the trend continuation, their formation occurring outside the bounds of the trading range (flat).
J. Schwager has acknowledged the given patterns of “Flag “ and “Pennant“ to be the figures of the trend continuation under the given conditions. Besides, this author has also described the points where he opens transactions when one deals with these patterns.
1. Under the condition of recoil, a pattern is being formed.
The breaking though the bound of the flag or pennant can be considered as the confirmation of the trend continuation. In addition, it can be regarded as a signal of opening a deal towards the trend direction. However, such breakdowns usually happen in the direction of the basic trend. The author prefers to open positions during the formation of the “flag “ or “pennant”, not waiting for the breakdown (breaking-through). This approach provides conditions more favorable for entering the market. Besides, the percentage of profitable deals does not diminish substantially.
2. Below we will dwell on the point of opening deals in the case of the “flag “ and “pennant” patterns - the reversal.
J. Schwager mentions that after breaking through “flags and pennants” U-turns (reversals) (!) happen almost as often (!) as breakdowns in the direction, opposite to the expected. After the breaking through the “flag or pennant”, the pattern lowest point can serve as a reference protective stop – in the case of ascending trend.
A substantial breakdown outside the bounds of the “flag“ or “pennant” can directed towards the side, opposite to the expected – i.e., against the principal tendency. Such breakdown can be regarded as a signal of the tendency potential reversal. For instance, in Chart 6.28 one should pay attention to the following fact. In a long train of “flags and pennants”, each of them has resulted in breakdowns towards the principal tendency direction. After the end of this sequence - in June - the exit out of the “flag” in the opposite direction has caused a drastic rise in prices.
As well as Murphy, E. Neiman has also regarded the “flag, pennant and wedge” as figures of the trend continuation.
We now examine Neiman’s approach to points of opening deals.
In the model of wedge, Neiman characterizes both the signals as intensive (+++). It is a good position for opening a deal.
Questions brought up by Masterforex-V Trading Academy.
1. J. Murphy examines patterns of “flag, pennant and wedge” only in large-scale timeframes. According to Murphy, duration of these models is respectively short. Within 1-3 weeks they come to an end. So, what a trader must do during this period? Under the condition of fall in prices, they are formed even in a smaller space of time. In this case, they often last not longer than 1-2 weeks.
There arises the question. Do you consider this approach to be correct? That is, do such figures (flag, pennant and wedge) are justified only in large-scale timeframes? Can be terms of the given model existence submitted precisely? Or, maybe, it would be more correctly to approve Masterforex-V Trading Academy viewpoint. According to the latter, all these patterns are identical in their essence – independently of the chart timeframe (M5, H1, D1, etc.). Correspondingly, the given chart depicts a figure of the trend continuation correspondingly to the given timeframe (M5, H1, D1, etc.). Otherwise, it can be the figure of reversal when the point of the beginning of a flag, pennant or wedge is broken through. Besides, some other additional conditions must be fulfilled.
2. J. Murphy, E. Neiman et al. consider the trading volume to be the confirmation of the fact that the flag, pennant or wedge is true - as figures of the trend continuation.
There arises the question. What can serve as a criterion of confirmation at Forex, where the volume of deals cannot be followed?
3. Is the below-given statement applicable to Forex? J. Murphy considers that the volume augmentation is much more important for the confirmation of the breakdown directed upwards than in the case of the downward-directed breakdown. According to the other statement, under the condition of the tendency of the fall in prices, even a smaller time interval is necessary for the formation.
4. In contrast to J. Murphy, D. Schwager is not just an analyst. He is a working trader and a manager of a large-scale investment fund. This specialist states that reversals after breaking through flags and pennants occur almost as often as breakdowns towards the direction, opposite to the expected.
a ). The reader should estimate the work done by J. Murphy and other analysts – the authors who classify patterns of “flag and pennant” as figures of the trend continuation.
b). The reader should again reread Schwager principal criterion of the difference between the true and false breaking through the level of “flag or pennant” – out of the range bounds. The reader should pay attention to the fact that the reversal “flags and pennants” also present outside the trading range bounds or in wide range of larger timeframes. In this connection, what criterion must be added the one submitted by Schwager in his “technical analysis. The complete course”.
c). Schwager has not mentioned that by no means every breakdown towards the direction opposite to the actual trend plays the role of the given trend reversal. On can give a lot of examples when the breakdown towards the direction opposite to the previous trend is false, after which the trend continues.
These are charts from E. Neiman’s books (“Trader’s small encyclopedia” and ” Master-trading. Secret materials”).
J. Schwager himself gives the analogous examples – false breakdowns towards the both directions, which do not change into a new trend.
So, what is a criterion of the true breaking through the opposite level? What is the difference between the true and false reversals?
In the chart by E. Neiman given below, the reader should determine what is a mistake from the viewpoint of methodology . That is, E. Neiman has disregarded a certain aspect, which is very important for traders.
The reader should try to improve this chart.
· The mistakes made by E. Neiman in this chart must be corrected.
· At least 4 (!) variants (possibilities) of the currency movement must be drawn – except the only one, presented by E. Neiman. Respectively, points of opening deals in these versions must be demonstrated.
Otherwise, as it’s submitted in Masterforex-V Trading Academy materials, beginners would place postponed orders at the A-point and wonder why do they lose in the course of trading.
The problems enumerated above are just a few of the problems that a trader must understand before opening a real account at Forex. Really, one can face with intricate situations of the recoil during the trend (patterns of “flag, pennant and wedge”). A trader must understand such situations before the auction but not during it – including the problems, unsolved by classicists of the technical analysis
You can discuss the chapter with the Academy members by following the link
Chapter 1. Trend definition in the Masterforex-V Trading System >>
Chapter 2. Levels of resistance and support in Masterforex-V Trading System >>
Chapter 3. Actual and false breakout of the resistance and support level. Rebound from technical level.>>
Chapter 4. Technical levels of Forex by Dow Jones agency. >>
Chapter 5. Pivot point of currency pairs >>
Chapter 6. Slanted Channels, as a tool of the Forex market analysis >>
Chapter 7. Opening of positions when using Slanted Channels >>
Chapter 8. Slanted channels in the Masterforex-V trading system >>
Chapter 9. Classic figures of technical analysis - Trend Reversal >>
Chapter 10. Classic figures of technical analysis - Trend Reversal (ending) >>
Chapter 11. Technical analysis - patterns of continuation of trend - rectangle >>
Chapter 12. Patterns of continuation of trend - Gaps >>
Read more:
Chapter 14. Models of the Forex technical analysis - triangles >>
Chapter 15. Symmetrical triangle - regularities and traps >>
Chapter 16. Ascendant and descending triangles - secrets of the strong signals for opening the positions >>
Chapter 17. Expanding triangle - unresolved problems of classics of the Forex technical analysis >>
Chapter 18. Trading On News: mistakes and unresolved secrets of classical analysis >>
Chapter 19. Trader's code of good practice by news under the Masterforex-V trading system >>
Chapter 20. Ally pairs: which gauge at forex is the most unbiased (impartial) and precise. >>
Book 3. Points of opening and closing of positions at the Forex market (basic course) >>
REPORT ERROR
