One of my favorite patterns as of late has been bull and bear flags on the indexes and selected stocks.

Bull flags work off the principle that ‘momentum precedes price’ and also somewhat that psychological factors cause investors/traders to move prices in equal or proportional waves, which is quite interesting.

To identify a “measured move” or bull flag, look for an initial momentum (price) impulse followed by a shallow but controlled pull-back or retracement against the initial momentum move, and then project the distance from “pole to flag” or from the start of the perceived impulse to the break of the flag.

The best flags I find pullback to a key moving average for confirmation of potential support.

I love trading these especially on the shorter time frames because the pattern is clear and the risk (stops) and target (projection) is also clear.

It really doesn’t involve complex indicators and it can be traded totally off price itself.

Let’s look at the pattern that occurred recently in the Dow Jones Industrial Average on the 60 minute timeframe:

I also call this the “lightning bolt” pattern because the annotated lines (they are NOT trend-lines) carve out a zig-zag type pattern.

Notice the immense consolidation period that occurred (green lines) that took price to the 50 period moving average. From this point, a large impulse occurred taking price above the green line, which signaled your initial entry into the trade.

A stop was placed a slight distance beneath the green line (channel) which would also be beneath the rising 50 period moving average (for added stability).

Price was projected to advance from the bottom of the impulse (pole of the flag) in a ‘measured move’ style fashion to the break, and we see price achieved that objective before rolling over quite forcefully as a result of the Federal Reserve’s decision (actually as a result of disappointment from large traders).

Study your own charts across various time frames to see if you can identify this pattern and if you might want to learn more about it to incorporate it into your own trading arsenal.