From The Free Forex Encyclopedia
A flag is a chart pattern used in technical analysis. Although it is less popular than triangles, wedges, and other commonplace technical analysis tools, traders consider flags to be extremely reliable consolidation patterns.
A flag forms when price shoots up extremely sharply in a single trading period, forming a nearly vertical line. This is known as the flagpole. After the flagpole forms, bearish traders, eager to capitalize on instant profits, begin selling off their holdings in the asset. However, this doesn't cause a rapid decline in price, as bullish traders begin buying up holdings of the stock, hoping to capitalize on future increases in price. The resulting declining trend channel resembles a downward-sloping parallelogram, giving the chart the appearance of a flag, and hence its name.
If prices fail to break the upper resistance line of the flag within twenty days, the flag pattern fails. If prices do break this level, however, another flagpole and another extreme peak in prices can be expected in the near future. This causes the flag, when confirmed, to be an extremely strong buy signal and an opportunity for massive profits with little time investment.