Stocks & Commodities V. 23:4 (22-31): Measuring Flags And Pennants by Markos Katsanos
This new statistically derived formula can help you
estimate price targets more accurately.
Flags and pennants are my favorite formations, and I have used them in my trading for some time. In using them, I found that my exit strategy and profit objective was far from optimal. The classical method used for measuring these common and useful formations is simple and straightforward, but how accurate and reliable is it? It’s difficult to find technical literature that provides any statistical studies on the subject. In fact, it is Robert Edwards & John Magee’s classic Technical Analysis Of Stock Trends, that standard of the industry, that provides the measuring formula and most other information on the subject. Given the limited amount of statistical studies on the subject, I decided to investigate.
I found 100 flag, pennant, or similar short-term
consolidation patterns for the past two years (2003–
04) using daily charts. My criteria for including a
pattern in the list was, first of all, a steep and quick
price rise leading to the formation of no less than 20%
from the lowest point of the flagpole. I excluded bearish flags that formed after a declining price trend from the current study. I then made a note of the price level and the date of the lowest and highest point of the pole, the point where prices break out above the upper trendline of the formation, and the breakout up to the first short-term top. I also noted the volume trend during the formation pattern.