Hi all, the pattern I've been watching develop over the last...

Hi all, the pattern I've been watching develop over the last week or so is the "High and Tight Flag" and here are some trading tips, targets and success rates according to Bulkowski's Pattern Site...

Firstly, although in this case it does look like a flag, a high and tight flag is often not a flag shape at all, but simply a tight congestion region at the top of a sharp rise (the pole). Volume will typically drop as the consolidation progresses as with a normal flag or pennant, however the key thing is that the closing prices are clustered together within a trading range of about 10% or less as with this example from LTR. The situation that leads to the formation of this pattern is easy to understand- we have a sudden almost doubling in price over a short period of time which inevitably leads to a profit taking consolidation, however the extent of the retracement is restricted by demand jumping in at levels not far below the top to keep the price at elevated levels. We can probably assume most of this keen demand is continued short covering, but as volume drops away and there is less willing supply (profit taking etc) at this level, the potential for new demand to join in and drive the price up further increases.

Before getting in to the entry and target prices, it's worth noting that according to Bulkowski, high and tight flags with a shallow up-sloping trend prior to the beginning of the pole tend to be more successful compared to a V-shaped bottom, and these patterns tend to play out within about 3 weeks before they cancel out and morph in to something else- which puts the end of the trading window for this pattern at about Anzac day.

So apparently there is a higher success rate with an entry after the flag breakout rather than before the breakout has confirmed. Here's some key levels and targets from Bulkowski's analysis of thousands of high and tight flag patterns:

• The breakout level for this flag is $1.67. Therefore entry after price closes above $1.67.
• Full target is $3.81, however only 6% of trades reach full target as part of this pattern playing out.
• "Measure rule" target (based on half-rise x win%) is $3.18, and 22% of trades reach this target.
• Only 19% of trades fail to rise less than 5% after closing above the breakout level- (approx $2.80).
• Stop should be placed just below the bottom of the flag ($2.55).

So anyway, I thought I'd highlight this potential short term trade set-up before it confirms because this is a game the whole LTR family can play with nice tight confirmation, entry and exit rules!!! (DYOR etc etc)

Good luck all, Rooster