Currency Secrets

One of my most favoured formations in ANY market is the flag formation.

What is it?

The flag formation can generally be seen by one large sudden movement in one direction (this is labelled the flag’s pole) followed by a congestion period that sits in the upper portion of the flag pole (it shouldn’t generally go any more than 50% of the flag pole’s length).

What excites me the most with flag formations is TIGHT sideways congestion after the initial breakout as this implies to me that there is likely to be a large move afoot soon.

So how can you profitably trade flags?

You can trade it any number of ways, but here some SECRETS that you’ll not find anywhere else about how to trade the flag formations PROFITABLY (here we will assume that the flag is a bullish one, i.e. where the initial breakout was up):

• Place a buy limit order slightly above the flag’s bottom. STOP LOSS: 5-10 pips below the flag bottom (very tight stops). TARGET: the distance of the flag pole
• Place a sell stop order at the same price as your stop loss in the above order. STOP LOSS: 5-10 pips above the flag bottom. TARGET: base of flag pole
• Place a buy stop order 5-10 pips above the high of the flag’s top. STOP LOSS: flag’s bottom less 5-10 pips. TARGET: the distance of the flag pole

If we look at the EURUSD on an hourly chart we can see that our first order would have been placed at trend line labelled “1″ which would have been around 1.2594, our stop loss would have been around 1.2589 – a very tight stop… and the main reason for this is that the distance of the flag’s top and bottom is only about 20 pips, therefore I would safely use a 5 pip stop, and our target of this trade would have been (open of flag pole = 1.2560, close of flag pole = 1.2615, distance = 55 pips), therefore our target would have been ~1.2650.

We would then have attached a sell stop entry order at 1.2589 using 1.2594 as our stop and the base of the flag pole as target (1.2560).

At trend line labelled “2″ we would have attached our buy stop entry order (1.2615) with the flag bottom (1.2592) as stop loss and target of 1.2670 (1.2615 + 55 pips).

If the EURUSD had entered us into our buy limit entry order and then rallied and entered us into the buy stop entry zone we would have immediately placed our first buy limit order’s stop loss to breakeven.

Anyway, there’s a “street smarts” way of trading the flag formation.

Tags: EUR USD, Forex Trading

This entry was posted on Wednesday, May 25th, 2005 at 10:39 pm and is filed under EUR USD, Forex Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.