Some chart patterns only occasionally appear on price charts. But when they do, they can provide excellent trading opportunities. One such pattern is the High Tight Flag Pattern, a rare candlestick formation that may give a strong signal for a massive price movement.
So, if you are keen to know more about this chart pattern, this guide is for you. We’ll show you how to identify the pattern and correctly trade it.
- What is the high tight flag candlestick pattern?
- How to identify and use the high tight flag pattern in forex trading?
- How to trade forex using the high tight flag candlestick pattern – Strategies and examples
- The high tight flag pattern – Pros and cons
- Key takeaways
- Frequently asked questions (FAQs)
What is the High Tight Flag Chart Pattern?
The high tight pattern is a rare bullish continuation pattern that is formed following a consolidation period and signals that another uptrend is about to start. This consolidation creates a flag-like structure, making it an easy-to-recognize and nice flag pattern. When the price breaks out of the flag, the high tight is completed, and the price continues to move upwards.
Now, if you are familiar with flag patterns, you can consider high tight as part of the bullish flag pattern. Generally, the bullish flag comes in various shapes, like the rectangular and the tight bull flag. The tight flags are considered more reliable as they come after a long and significant bullish movement, and they create a good entry point with tighter stop-losses.
When we talk about tight patterns, we also have to look for loose flag patterns, as they both look similar and can be confusing. Loose flags are usually wide, meaning that the price tends to break out of the upper and lower channel during the consolidation phase. Conversely, in a tighter flag, the price stays between the channels.
But what’s the reason behind the formation of the pattern?
The idea behind the high tight flag pattern is that even though the price has increased significantly in the previous price trend, the bullish momentum is so strong that after the period of consolidation, the price is likely to continue in the upward direction.
In fact, the high and tight flag pattern is among the most bullish chart patterns in technical analysis. The high tight flag is technically characterized by an upswing where the price doubles by at least 80% to 100% over the last 4-8 weeks. That is why the pattern appears more often in the stock market than in the forex market.
That said, you can still identify the high flag pattern in forex trading, though you may have to ignore the first rule of an 80% to 100% increase over the last 4-8 weeks, and use it in any scenario of a substantial price rise.
How to Identify the High Tight Flag Candlestick Pattern in Forex Trading?
As mentioned earlier, the high and tight flag pattern appears rarely, so identifying it can be slightly challenging. Also, the pattern usually occurs in the stock market more often than in the forex market.
Still, once you learn how to identify the pattern, you will find that it is among the most rewarding chart patterns in technical analysis. That is largely because the pattern enables you to join an existing trend with a strong bullish momentum.
So, to draw the pattern, you first must draw a trendline, that is, the flag. Next, you must draw upper and lower lines starting from the flagpole.
The general characteristics of the pattern are:
- The pattern must appear in an uptrend of 100% or more in 4-8 weeks.
- Following a strong upswing, a lengthy consolidation phase occurs. The pullback must be between 10%-25%.
- Once the price breaks through the upper channel, a bullish signal is made and you can enter the trade.
As you can see in the GBP/USD 1H chart above, once the price breaks above the upper level of the flagpole, a strong bullish uptrend continues.
Now, let’s focus on the consolidation phase, as this is the most crucial aspect to determine if the price will continue to increase.
For the high tight flag pattern to be valid, the price must retrace between 10% to 25% from the highest level of the previous price swing. This retracement confirms a Wyckoff stage at which large financial institutions and investors place large order blocks to accumulate large amounts of the asset.
For those unaware, a Wyckoff stage appears when the price goes upwards/downwards, then retraces for a consolidation. According to the famous Wyckoff chart pattern, this is the trading area when the big players begin to enter the market, and they eventually push prices in a specific direction.
So, when this happens, the price may break through the upper line, and thus, we have a high tight flag candle pattern.
To summarize, you must remember some key points to identify and trade with the high tight pattern.
- Look for the pattern in an uptrend of at least 100%.
- Draw lines for the flag pole and the consolidation phase.
- The price must retrace 10%-25% from the flag pole’s highest level.
- Once the price breaks above the upper line of the consolidation phase, you can enter the trade.
How to Trade Forex Using the High Tight Flag Pattern – Strategies and Examples
Now that you know how to identify the high tight flag pattern, let’s see how you can use it to find profitable trades.
At basic, with the high tight flag, you apply the breakout strategy. Once the price breaks through the upper line, we have a first signal that the price will continue upwards. However, you must first identify the pattern, find a consolidation phase, and add another technical analysis tool to confirm the breakout.
So let’s go step-by-step to show you how to trade with the high tight flag pattern.
Step 1: Identify an Uptrend
The first step in trading the high tight flag is properly identifying it. As the pattern is bullish, you have to look for it during an uptrend. For the high tight flag pattern, the price must rise at least 100% over the last 4-8 weeks. From there, you can draw a flag pole, which is a very useful trend line regardless of the high tight flag pattern.
The flag pole has to be diagonal, and you should draw it from the starting to the highest level of the last upswing.
Step 2: Wait for the Consolidation Phase
Once the first upward trend ends, you must wait for the price to retrace. Then, the price trends downward and may enter into a ranging market. In this area, you are looking for consolidation or just a pause in the upward trend. This is where the Wyckoff stage comes in, and all market participants accumulate the asset.
To identify the consolidation phase, you must find clear support and resistance levels and normally low trading volume combined with unexpected large transactions.
Step 3: Wait for the Price Breakout and Use a Moving Average Indicator to confirm the Breakout
After the consolidation phase, the price must break above the upper line. Once it breaks, the high tight flag pattern is valid, and you get a signal to enter a trade. For confirmation, you can use moving averages or any other trading tool like Fibonacci retracement levels.
In the example below, we used a basic moving average line as an extra tool to confirm the breakout.
The chart above shows that when the price begins to break above the upper trend line, it also breaks above the 100 moving average trend line, confirming that the trend is likely to continue.
Step 4: Enter a Position, and Set Stop-Loss and Take-Profit
The last step is to enter a trade.
So, when trading the high tight flag candlestick pattern, you enter the trade once the price breaks above the upper line and get an extra confirmation from another indicator.
For stop-loss, you can set it at the lower line of the flag, meaning the SL order is very tight. As for take-profit, you can look at the previous high or use the 50% rule, at which you calculate the last upswing and use half of it to determine your exit level.
The High Tight Flag Pattern – Pros and Cons
Although the high tight is a solid bullish pattern that may produce huge returns if used correctly, it also has drawbacks. So let’s find out the pros and cons of trading with the high tight flag pattern.
- The pattern provides a clear entry point
- Typically, the high tight flag may produce big returns as the second upswing may be significant
- The pattern is very accurate and reliable
- The high tight flag enables investors to set tighter stop-losses
- The high tight flag chart pattern rarely occurs in the markets
- The pattern may not work on shorter timeframes
Now, let’s check the key takeaways from this article.
- The high tight flag chart pattern is a bullish continuation pattern
- The pattern starts with an initial uptrend, followed by a price retracement. Then, following the consolidation mode, a trend continuation signal is given once the price breaks above the upper line
- You can enter the trade when the price breaks above the upper line of the flag
- You can add other indicators or tools like the Moving Average and Fibonacci support and resistance levels to confirm the trend
- Stop loss is placed at the lowest price level of the flag. Take profit target could be placed at a 50% ratio of the first upswing trend
Frequently Asked Questions (FAQs)
Here are the most frequently asked questions about the high tight flag pattern:
Is the high tight flag chart pattern bullish or bearish?
The high tight is a bullish continuation chart pattern. It starts with an uptrend, retraces for a while, and then the price increases. Then, during the consolidation mode, you can identify the high tight flag pattern and join the existing bullish trend.
What does a high tight flag chart pattern indicate?
The high tight flag indicates a robust bullish momentum in the market. Based on the theory behind this pattern, big players enter the market during the accumulation (consolidation/correction) phase, eventually pushing prices much higher.
What is the main difference between a high tight flag and a bullish rectangle chart pattern?
The high tight and the bullish rectangle patterns are both known as flag patterns. As the name suggests, the rectangle flag has a rectangular flag, and the price tends to rise modestly following the breakout. Also, the first upswing may be less rapid and significant.
On the other hand, in the high and tight flag pattern, the price stays in a tight range in its consolidation phase, and the first upswing must be massive, with an increase of at least 80% to 100%.