A flag or pennant pattern forms when the price rallies sharply, then moves sideways or slightly to the downside. This sideways movement typically takes the form or a rectangle (flag) or a small triangle/wedge (pennant), hence their names.
[ ] flags [ rising channels in a bearish trend / falling channels in a bullish trend] and
[ ] pennants [ rising wedges in a bearish trend / falling wedges in a bullish trend]
They are traded in the same way, but each has a slightly different shape. The terms flag and pennant are often used interchangeably.
Draw trendlines along the highs and lows of the sideways price action. The sharp price rise preceding the flag or pennant is called the flag pole.
The sideways period is often followed by another sharp rise. This is where the trading opportunity comes in. Once the flag pole and a flag or pennant have formed, traders watch for the price to breakout above the upper flag/pennant trendline. When this occurs, enter a long trade.
The above pattern is bullish, because the pattern started with a sharp rally.
There are also bearish patterns, where the price drops sharply then forms the flag or pennant. With this pattern, watch for the price to break below the flag/pennant.