Stocks & Commodities V. 23:5 (48-57): Detecting Breakouts From Flags & Pennants by Markos Katsanos
Here’s a system to identify and trade flag and pennant formations.
In my previous article, I wrote about the measuring implications, duration, and identifying characteristics of
flags and their variations, and promised to present a system to identify and trade these short-term and highly profitable formations. I constructed a viable system by distilling the most useful statistics together with technical observations of 100 flag and pennant samples. I optimized the test parameters in further out-of-sample testing of a list of 250 stocks.
In this article, I have presented the formula and methods used in this system, along with the test results on four stocks. I found the most profitable test returned an adequate 187% profit being only 8% of the
time in the market, versus a tragic 91% loss for the buy and hold investor.
A frequent trader, however, will need to wait for the next entry signal, since the system test produced only one trade per year on average. Nevertheless, this need
not be a major disadvantage, as a daily scan of a large database of stocks is bound to produce a few trades. I ran a MetaStock exploration on a database of 1,250 stocks and produced 13 hits. Results were highly
profitable, producing an annualized 735% profit.