How to Scan for High Tight Flags

High Tight Flag

Introduction

In the world of stock trading, there are numerous repeatable chart patterns and indicators that can help traders identify potential opportunities.

One of the most rare patterns is the High Tight Flag, which can produce high momentum moves as it did with TASR in 2003.

TASR formed multiple High Tight Flags as it advanced over 3000% in under 1 year.

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In this article, we will explore what a high tight flag is, its characteristics, entry points, psychology, and how to find them using Deepvue.

What is a High Tight Flag?

How to Scan for High Tight Flags

A high tight flag is a bullish continuation pattern that occurs when a stock makes a sharp upward move (the “pole”) followed by a period of consolidation (the “flag”).

It is characterized by a tight and narrow trading range with decreasing volume, indicating a temporary pause before the stock resumes its upward trend.

The high tight flag pattern is often seen as a sign of strong demand and can lead to significant price gains. We consider the high tight flag to be one of the “traditional” chart patterns.

Hight Tight Flag Characteristics

When analyzing a high tight flag chart pattern, several key requirements are necessary to properly identify this pattern. These requirements include:

  1. Substantial Gain in a Short Period: The High Tight Flag pattern requires a dramatic increase in the value of a stock or other financial instrument. Specifically, this is an increase of at least 100% over a period that does not exceed eight weeks.

    This significant and fast gain is often referred to as the ‘sharp pole', representing the upright portion of the flag in the chart pattern.
  2. Flag Duration: The flag, which indicates a consolidation period following the sharp pole, should last for a certain period. The duration of this period needs to be within a specific range: it cannot be shorter than five trading sessions, but it should also not exceed three weeks.

    This consolidation period represents a pause in the upward price action, which is why it is visualized as a flag in this chart pattern.
  3. Flag Depth: The depth of the flag refers to the degree to which the price retraces from the top of the sharp pole. In a High Tight Flag pattern, the price drop or retracement should not exceed 25% of the peak price reached at the end of the sharp pole.

    This relative shallowness of the retracement shows that the market sentiment remains largely bullish despite the temporary pause.
  4. Price Tightness: This relates to the level of fluctuation in the price of the financial instrument within the flag phase of the High Tight Flag pattern.

    It's crucial to note the potential for “inside days” during this phase. An inside day is a day where the price range is completely within the price range of the previous day.

    The occurrence of these inside days and tight tight ranges indicates a tightening in price range between the Down Trend Line (DTL) and Up Trend Line (UTL), showing a decrease in volatility and subtle accumulation.

    This can often be a precursor to a strong move as market participants make up their mind about the direction of the price. The more of these inside days that occur within the flag, the tighter the price action.

    This reduced volatility, coupled with the previous upward surge, can potentially signify an upcoming strong upward move once the stock breaks out.
  5. Decreasing Volume in the Flag: As the flag forms, trading volume tends to decline compared to the volume during the pole.

    Decreasing volume indicates a reduction in selling pressure and suggests that the stock is preparing for the next leg up.

    Look for subtle higher volume on up days than down days within the flag.
  6. Clear Breakout: Lastly, for a High Tight Flag pattern to be confirmed, there needs to be a clear breakout above the downtrend line (DTL), the previous high, or a failed breakout high.

    A breakout confirms that the consolidation phase has ended, and the price is resuming its upward movement. This is typically seen as a signal for traders to consider entering the market.

    Watch for explosive volume on the breakout. A strong breakout closing near highs on huge volume is a strong signal that the next leg up will be successful.

Example:

How to Scan for High Tight Flags
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High Tight Flag Entry Point 

Identifying the optimal entry point is crucial when trading high tight flag chart patterns. To determine the entry point, traders can consider the following entry possibilities:

  1. Breakout: Wait for the stock to break out above the previous pole high price, all time high price, or the failed breakout high price with above-average volume This breakout confirms the resumption of the upward trend and validates the high tight flag chart pattern as having truly worked in this instance for a real price advance into new highs. 

    Intraday as the stock is breaking out, look for extremely high volume run rates. You can use the Deepvue Run Rate or Relative Volume data points to see this easily.
  2. Break above the Downward Trend Line (DTL): Cheat entry into the stock on a break above the DTL in the flag pattern intraday with preferably above-average volume. Preferably, the stock is also emerging from a tight range.

    This entry involves anticipation while also respecting risk and using logical stop losses. The break above the DTL is similar to the launch pad setup in that it anticipates a move to the upside.
  3. Support at the Upward Trend Line (UTL): You can also look for a cheat entry as the stock pulls back into on support at the UTL in the flag pattern intraday. Preferably the rebound from this area occurs on above-average volume. This entry involves anticipation while also respecting risk and using logical stop losses (in this case the most logical is the UTL itself).

    The support at the UTL implies a higher low and is also similar to the launch pad setup.
  4. Pullback Strategy: Alternatively, traders can employ a pullback strategy by waiting for a slight pullback or retracement after the breakout. This approach can help mitigate the risk of entering the trade at the peak and provides a better risk-reward ratio.

High Tight Flag Psychology 

Understanding the psychology behind the high tight flag pattern can provide valuable insights into market sentiment and help traders make informed decisions. The psychology behind the pattern is as follows: 

  1. Accumulation: During the formation of the flag, smart money accumulates shares, causing the stock to trade within a tight range. This accumulation phase allows institutions and experienced traders to establish positions before the next leg up.
  2. Breakout Catalyst: The breakout from the flag triggers a surge in buying activity as more market participants recognize the bullish potential. This influx of buying pressure pushes the price higher, often resulting in a powerful push into new high ground.

Scanning for High Tight Flags in Deepvue 

In Deepvue, there are a few ways that you can effectively scan for the high tight flag chart pattern. Please consider the following custom built scan as a possible avenues to effectively detect high tight flags:

How to Scan for High Tight Flags

3 High Tight Flag Examples 

To better illustrate the high tight flag pattern, let's explore a few examples of stocks that exhibited this pattern in the past and provided clear entry point based on the criteria established above:

  • HEAR – May 2018
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  • BMEA – June 2022
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  • IMVT – October 2022
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Conclusion 

The high tight flag pattern can be a valuable tool for traders looking to identify bullish continuation opportunities.

By understanding its characteristics, entry points, psychology, and utilizing Deepvue for efficient scanning, traders can use High Tight Flag entries to catch powerful momentum moves.

Frequently Asked Questions (FAQs)

High Tight Flags (HTFs) are a rare kind of technical analysis pattern seen in stock trading. They are typically formed when a stock rises 100% or more within two months, followed by a tight range consolidation phase where prices don't correct more than 20%.

HTFs are significant because they often signal the possibility of a strong continuation in the bullish trend. After such a strong run-up and a minor consolidation, the stock may continue to advance rapidly if the pattern is valid.

The consolidation phase signifies a period of indecision where buyers and sellers are balancing out. This period is usually brief and accompanied by lower volume. The fact that prices don't correct significantly is a sign of strength and often leads to continuation of the uptrend.

While the HTF pattern can be highly rewarding due to its potential for large price advances, it is also risky. This pattern is rare and the stocks forming this pattern can be highly volatile.

HTFs typically occur in strong bull markets, as such significant and rapid price advances are often driven by optimistic market sentiment and increased buying pressure.

Volume is a key factor in validating a HTF pattern. During the rapid price increase, volume should be high, indicating strong buying pressure. During the consolidation phase, volume usually decreases, and upon breakout, volume should ideally increase again.

Yes, traders often use HTFs in conjunction with other technical indicators like Deepvue's Relative Strength Line, Deepvue's Weinstein Stage Analysis Indicator, and MACD to confirm the pattern and increase their probability of success.