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Master The 21/55 EMA Day Trading Strategy And Be Successful - YouTube
Channel: The Secret Mindset
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Chart patterns are a crucial component of
trading.
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Each chart pattern offers a unique outlook
on the potential price movement.
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Today we’ll discuss one high probability
continuation formation known as the Flag pattern,
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and by the end of this video, you will know
exactly how to spot the pattern accurately…and
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be able to trade it confidently and profitably.
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The Flag pattern is one of the best-known
continuation formations in trading, which
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typically appears as a minor consolidation
between impulsive legs of a trend.
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When this pattern forms on the chart, there’s
a high likelihood that the price action will
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break in the direction of the prevailing trend.
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The Flag pattern consists of two parts – a
flag pole and a flag.
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Let’s take a closer look at each of these
two components.
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The first component of the Flag chart pattern
is the Flag Pole.
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It represents a trend impulse on the chart.
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After creating the pole, a valid Flag pattern
will then begin to trade within a tight range,
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taking on the shape of a Flag.
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The Flag consists of price action with evenly
distributed tops and bottoms.
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At the same time, this price action has a
corrective character on the graph.
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In this manner, it is angled contrary to the
trend impulse creating the pole.
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There are two types of Flag chart patterns
based on their structure and potential – a
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bearish Flag and a bullish Flag.
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Each of these is the absolute opposite of
the other.
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The bear Flag pattern forms during bearish
trends.
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The figure starts with a bearish trend impulse
and turns into a correction, which is directed
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upwards.
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During the correction phase, the tops and
the bottoms are evenly distributed, creating
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a parallel channel.
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The confirmation of the Bear Flag setup comes
when the price action breaks the flag channel
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boundary downwards.
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When the breakout occurs, we have the opportunity
to short the asset.
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The Bull Flag pattern is the opposite of the
Bear Flag pattern in appearance.
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First, it forms during bullish trends.
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The pattern begins with a bullish trending
move, which then pauses and turns into a minor
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bearish correction.
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The tops and the bottom of this correction
are parallel as well.
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The confirmation of the Bullish Flag pattern
happens with the upside breakout, and we would
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prepare for a long position.
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The Flag Pattern has a continuation potential
on the chart.
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A valid flag pattern is likely to push the
price action further in the direction of the
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Flag Pole – the trend impulse.
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In addition to this, when you spot a Flag
formation on your price chart, you can measure
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the approximate price target of the formation.
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There are two targets related to the Flag
formation:
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The first target of a confirmed Flag pattern
can be derived using the measured move technique.
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The measured move target is a distance equal
to the size of the flag.
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To measure the size of the flag, you would
just take the vertical distance between the
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upper and the lower channel within the flag.
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Then you would apply this distance starting
from the breakout point.
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Your first target is located at the end of
this distance.
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Target 2: Size of the Pole
The next target of the Flag formation equals
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the size of the Flag Pole.
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So, to get this target, you need to measure
the vertical distance between the high and
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the low of the Pole.
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Once you get that distance, you will need
to apply it to the pattern.
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Again, as we did with Target 1, you would
apply it starting from the breakout point.
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Now that we discussed some of the characteristics
of the Bull and Bear Flag, let’s create
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a concrete trading strategy around this setup.
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At first, I want to add two Exponential Moving
Averages, to help us identify an uptrend or
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a downtrend easily.
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In this case I added the 21 and 55 EMA, but
you can choose any length you prefer.
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When the 21 EMA is above the 55 EMA, we consider
the market to be in an uptrend.
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So we only want to start looking for the Bull
Flag Pattern when the 21 EMA has crossed above
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the 55 EMA.
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If the 21 EMA is below the 55 EMA, we will
look for Bear Flag Patterns.
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Why this filter?
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Because when the market is trading above the
21 EMA, for example, it means there is strong
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momentum to the upside.
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And any Bull Flag Patterns that are formed
above the 21 EMA have a higher chance of succeeding.
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To enter a Flag pattern trade, you should
first obtain a confirmation signal.
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The confirmation of the Flag comes with the
breakout.
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If you have a bullish flag, you will buy when
the price action closes a candle above the
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upper side.
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If you have a bearish flag, then you would
sell the asset when you see a candle closing
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below the lower level of the pattern.
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One basic rule should be considered when determining
the proper stop loss placement.
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If the price breaches the opposite side of
the breakout, then you should immediately
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exit the trade, because the pattern is most
likely false.
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The most logical location to place the stop
loss would be beyond the most extreme swing
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within the Flag structure.
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So, if you were trading a bullish flag, then
your stop should be placed below the lowest
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bottom in the Flag.
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The take profit for the Flag pattern should
be addressed using the two targets we discussed
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earlier.
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It is up to you which target you are going
to pursue.
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However, I would suggest taking profits at
each target level to reduce risk and book
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profits.
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To enter into a trade using the Flag Pattern,
I also prefer to look for a candlestick pattern
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that forms on the dynamic area offered by
the 2 EMAs, namely the engulfing candle and
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the pin bar.
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These 2 candlestick patterns are the trigger
for us to get into a trade.
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If you trade a bullish flag for example, and
you have a bullish candlestick that forms
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on the 21 EMA, it suggests that the EMA has
held up as a dynamic support level.
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At the same time, a bullish candlestick pattern
suggests that the market has a good chance
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of going up after its formation.
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Basically, you want a confluence of these
elements to give you a high probability of
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the trade working out.
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So how do you enter into the trade once these
candlestick patterns appear?
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There are 2 main entries.
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The first one was to wait for a breakout,
which is a more conservative way to trade.
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The second entry method is a more aggressive
entry because you do not wait for a confirmation
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of the move and take a trade before the breakout,
at the close of the candlestick pattern inside
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the flag pattern or at the break of the high
or low of the candlestick.
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By confirmation, it means to wait for another
event to happen to give you a better indication
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that the market will be going up for example,
if you trade a bull flag.
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This means you don’t wait for the breakout
to happen.
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With this entry, you will have a higher risk-to-reward
ratio for the same take profit level…
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But the trade-off is that you will get stopped
out more often.
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The ideal scenario would be a pin bar or an
engulfing candle that forms right when the
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price breaks the flag, but this is rare setup.
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I prefer to have a confluence of factors,
namely the price rejecting the dynamic area
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formed by the 2 EMAs, the formation of a candlestick
pattern and a flag breakout.
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With any trading setup, the more signals you
have supporting the direction of your trade,
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the higher the chances of your trade working
out.
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Here are several examples of valid trades.
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If you trade stocks, many traders use volume
as an added confluence of trade signals.
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What you want to look out for is for an increase
in volume when the market starts moving up
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from the Bull Flag Pattern, for example.
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Here, you can see that the volume has increased
when the market broke out from the Bull Flag
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Pattern.
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This shows that there are buyers coming in
to push the market up.
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And this gives traders an added validation
that the Bull Flag Pattern has a higher chance
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of working out.
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As a side note, in the Forex Market, you can’t
use volume because there’s no centralized
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exchange.
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This means the volume you see in the Forex
market is not an accurate representation of
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the total volume in the market.
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You can also increase the flag pattern’s
probability with divergence.
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A divergence is when the market is moving
in a different direction than your indicator.
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There are a few indicators that can identify
divergence…But what I like to use is the
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Stochastic Oscillator.
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To identify a divergence on the Bull Flag
Pattern for example, what we’re looking
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for is for the market to be forming a higher
low but the Stochastic Oscillator to form
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a lower low.
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This is called a hidden divergence.
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Also, remember the previous confluence elements
we discussed before.
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Thus, at the point where the candlestick pattern
is formed, we want the Stochastic Oscillator
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to form a lower low.
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Here’s an example.
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We have hidden divergence, as the market is
making a higher low but the Stochastic Oscillator
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is making a lower low.
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The setup is even more powerful is it contains
a candlestick formation or if the price rejects
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the dynamic area formed by the 2 EMAs.
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So whenever you are looking for an entry,
you want to see that there is a hidden divergence
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to give you the added confluence that the
Flag Pattern will work out.
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Here, you can see that the market is clearly
in a downtrend.
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The 21 EMA is below the 55 EMA, and the market
is forming lower lows and lower highs.
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The market went down and formed the Bear Flag’s
flagpole in a few bars.
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After that, the market started consolidating
and moved sideways.
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If you noticed, the bars are relatively smaller
as well.
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This is a sign that the market is preparing
for a possible downwards move.
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Just as the price entered the dynamic resistance
area , it formed a Bearish Engulfing Candle.
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At this point, you can see that the Stochastic
Oscillator is indicating a hidden divergence.
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So this is a valid trade signal.
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The market will give you many opportunities
to trade this setup.
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However, you don’t want to make the mistake
of trading every single one of them.
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You will be tempted to trade it every time
it shows up.
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But if you see a Flag Pattern that doesn’t
fulfill our confluence setup, give it a miss.
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Be patient and wait for the next opportunity.
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If you got any value from this and learned
something new, leave us a like to show your
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support, subscribe to our channel and click
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Until next time.
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