Trade Plan: Right Triangle Flags Trading flags is one of the most common types of technical trading strategies traders use. This type of Trade Plan is considered a “break out” strategy, though often can be in the direction of the general trend (i.e. taking the next leg in a longer term move). Flags are in a sense a coiling mechanism for price to get the courage to go to the next level.
The key will be patience to let the “price pattern” develop and to enter the trade, so as not to get in a fake-out move. It can be very profitable way to trade, as we tend to favor “price pattern” indicators over “price derived” indicators. We have talked about flags before, but let’s dig a little deeper into this type of Trade Plan.
Description: The following are the key set-up conditions before the Trigger:
- Look for right triangle flag price pattern, that has a flat bottom or top. This flat bottom or top is the support level that price is trying to break through.
- Price must be breaking to recent (e.g. in the last 200 to 500 bars) new lows/highs to be a real break.
- There should be at least 3 or more price touches of this support line, creating at least three waves within the right triangle.
- Judging “price patterns” is sometimes difficult, but your skill will be based on identifying these well developed right triangle flags – don’t stretch a “price pattern” just to get into a trade.
Now follow along the chart graphic provided as we describe the specifics using the Short case (the opposite is true for a Long case) for the after set-up conditions.
Trigger: After the set up conditions are met, take entry on the break of the right triangle flag’s support. Do not be too quick to enter the trade. Ensure you get a close of a bar below the support line of the right triangle flag.
Target: 1.5 to 2 times the Stop.
Stop: At the last swing high (3 successive lower highs in the right triangle) before the break of the right triangle flag.
Order Management: The PSR (Profit Stop Ratio) should be 2 to 1 or no less than 1.5 to 1 (STAY IN THE TRADE). Do not be too quick to enter the trade on the break of the right triangle. Ensure you get a close of a bar below the support line.
Filter: Always trade in the direction of the 50MA. You may also avoid this pattern during major market news events.
One could consider using this on the 15 minute or the 1-hour charts, though other time series could also be considered if the risk amount of the Stop matches your risk budget tolerance. Please click here or see below for a video presentation of this Trade Plan.
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