If you happen to see a chart pattern that looks like a rectangle tilted against the current trend, chances are that you’ve identified a flag, a classic chart pattern. And one thing about flags is that the tighter the flag, the more explosive the breakout (not always, of course, but often that’s the case).

flag1 Swing Trading a Bullish Flag Formation (BZH)

Bullish flags often tilt against a prevailing uptrend. Sometimes, though not often, you find a flag tilted in the direction of the trend, but most often you’ll find the consolidating pattern working its way downward, in some cases, retracing up to 50% of the current swing.

 

Recently, Beazer Homes USA Inc (BZH) exhibited a bullish flag formation between July 12 and July 22. 

flag2-300x139 Swing Trading a Bullish Flag Formation (BZH)

The flag [1] formation began descending from the peak price of  10.87 after which it began tilting against the prevailing trend. The entire formation, including “flagpole” [2]  started from the price of 9.14. The flag’s lowest point [3] can be estimated at around 10.40. 

 

Anticipating a breakout, a swing trader might have placed a buy stop at the top of the flag pattern or, for a more aggressive entry, a trailing buy-stop slightly above the high of each descending bar (or candle). A stop loss might have been placed slightly below the flag low. July 23 saw a false breakout followed by a breakout the next day. 

 

How might a swing trader have set an upside target? There are a few ways. One way would be to target a reasonable resistance level. Another way would be to add the difference between the flag formation top to the entire pattern low (including flagpole) to the flag low. 

 

The target at [4] which was eventually hit five days after the initial breakout was derived using a measure rule borrowed from technical analyst Thomas Bulkowski. By obtaining the difference between the entre pattern high and low,–the result being 1.73–we multiplied that difference by 0.64 to get 64% of the total swing, the result being 1.11. Adding that target to the flag bottom of 10.40, we get a target of 11.51 which was hit today (July 30). 

 

Like all chart patterns, flags don’t always work out as expected. In this case it did. We assume that every swing trader takes proper precautions, exercising tight money management when placing trades.

 

The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.