Chart patterns are good warning signs as well. If properly identified, it can help anticipate when the price would continue or when it will reverse. I pay close attention to flags, head and shoulders, and triangles.
Now we will talk about Flags :
When the price makes a sudden move up or down, it forms a very steep angle. This angle is almost vertical hence it is called the “flagpole”. Once price has reached the top of its pole, it slants against the trend to form a channel, which is called the “flag”.
In an uptrend, the flagpole is upright, and the flag is slanting downwards. When the price surged up, many traders decided to sell causing the price to go down. However, more buyers come in, increasing the price and causing a break out.
When price breaks from the superior channel line, the price continues to go up. This is a buy signal. A failure of the flag pattern occurs if the channel is not broken.
The exact opposite is true in a downtrend. The flagpole is inverted, and the flag is slanting upwards.
A sell signal occurs when price breaks the inferior channel line.
However, not all flags can be clearly seen because they can be much shorter in duration. The important feature of flags is that the price moves within a channel.