Chartered Market Technician (CMT) Practice Exam

A flag is recognized as a consolidation pattern that forms after a strong price movement, either upward or downward. It appears as a rectangular shape that resembles a flag on a pole, where the pole represents the initial price movement and the flag itself represents a period of consolidation. During this time, the price oscillates in a relatively narrow range, which can be seen as a pause before the prevailing trend resumes.

As a consolidation pattern, flags indicate a brief correction to the preceding price movement, allowing the market to consolidate gains or losses. Traders often look for the price to break out of the flag shape to continue in the direction of the previous trend, affirming its nature as a continuation pattern. This is crucial for traders looking for opportunities to enter the market in the direction of the trend after the consolidation period.

Thus, defining flags solely as a consolidation pattern highlights their role in the market cycle and provides valuable insight to traders on when to anticipate potential price movements following a period of stability.