Do You Salute the Flag? | Forex Technicals

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Do You Salute the Flag?

Tuesday, 11 November 2008 14:32

The EUR/USD and the USD index are both breaking out of a much commented upon pennant pattern today. The USD is gaining a lot of strength and the breakout looks pretty solid. However are pennant and flag patterns very predictive and are there ways to improve your performance when using flag patterns to trigger a trade? price patterns

Mechanical tests show flags and pennant patterns as one of the worst performing technical patterns. I suspect the reason for this has to do with the fact that they appear over a very short series of trading periods. This doesn't mean that traders should ignore the signal we are getting today about more strength in the USD, it just makes risk control more important.

You can improve some of your results by looking for a descending pattern of volume during the flag or pennant formation. You can see this pattern of falling volume while the USD index consolidates into a pennant breakout in the chart below. In the video for this article I will show how you can find volume in formation in the futures market for forex pairs.

You can learn more about price patterns with in our technical analysis of stocks and options section.

USD Index Daily Chart with Volume

The current pattern on the USD or EUR/USD currency pair indicates potential to the upside. Most traders will measure the "pole" of the flag or pennant pattern and project that same distance from the pattern breakout as an initial profit target. In this case, the "pole" is the minor bottom on the USD index in late September to the peak at the end of October.