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HA - Swing Trading a Bullish Flag Formation in BZH

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If you happen to see a chart pattern that looks like a rectangle tilted against the current trend, chances are that youve identified a flag, a classic chart pattern. And one thing about flags is that the tighter the flag, the more explosive the breakout (not always, of course, but often thats the case).

Bullish flags often tilt against a prevailing uptrend. Sometimes, though not often, you find a flag tilted in the direction of the trend, but most often youll find the consolidating pattern working its way downward, in some cases, retracing up to 50% of the current swing.

Recently, Beazer Homes USA Inc (BZH) exhibited a bullish flag formation between July 12 and July 22.

The flag [1] formation began descending from the peak price of 10.87 after which it began tilting against the prevailing trend. The entire formation, including flagpole [2] started from the price of 9.14. The flags lowest point [3] can be estimated at around 10.40.

Anticipating a breakout, a swing trader might have placed a buy stop at the top of the flag pattern or, for a more aggressive entry, a trailing buy-stop slightly above the high of each descending bar (or candle). A stop loss might have been placed slightly below the flag low. July 23 saw a false breakout followed by a breakout the next day.

How might a swing trader have set an upside target? There are a few ways. One way would be to target a reasonable resistance level. Another way would be to add the difference between the flag formation top to the entire pattern low (including flagpole) to the flag low.

The target at [4] which was eventually hit five days after the initial breakout was derived using a measure rule borrowed from technical analyst Thomas Bulkowski. By obtaining the difference between the entre pattern high and low,--the result being 1.73--we multiplied that difference by 0.64 to get 64% of the total swing, the result being 1.11. Adding that target to the flag bottom of 10.40, we get a target of 11.51 which was hit today (July 30).

Like all chart patterns, flags dont always work out as expected. In this case it did. We assume that every swing trader takes proper precautions, exercising tight money management when placing trades.

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About the author

Karl Montevirgen is an independent content writer. Having been involved in the commodities and FX markets for the last 9 years, Karl writes for several companies and publications in the finance space. 

You can view his extended profile, list of publications, and theoretical content work on his LinkedIn page. 

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