Flags vs Wedges: Continuation Pattern Comparison

Flags and wedges are both short-term continuation patterns that form after a strong move. They look similar — both are small channels against the prior trend — but they break in opposite directions more often than traders expect. Confusing them turns a continuation trade into a reversal loss.

The Flag

Structure: a sharp, near-vertical prior move (the "pole"), followed by a small rectangular channel that retraces 25-50% of the pole. The channel slopes against the trend — bullish flag slopes down, bearish flag slopes up. Duration: 1-3 weeks on daily, 1-3 hours on intraday.

Volume: declining through the flag. Breakout volume 1.5-2x average.

Breakout direction: with the prior trend. Bullish flags break up 70-80%; bearish flags break down 70-80%. Flags are among the highest-probability continuation patterns.

Entry: on the break of the flag in the trend direction, or on a pullback to the flag's channel edge. Stop: beyond the opposite side of the flag. Target: the pole height projected from the breakout (the "measured move").

Key rule: the flag must retrace less than 50% of the pole. A retracement beyond 50% is not a flag — it is a reversal.

The Wedge

Structure: converging trendlines sloped in one direction. Rising wedge: both boundaries slope up, converging. Falling wedge: both slope down, converging. Duration: 3-6 weeks typically.

Volume: declining into the apex (same as flag and triangle).

Breakout direction: against the wedge's slope. Rising wedges break down 65-75%; falling wedges break up 65-75%. The wedge is a reversal pattern despite looking like a continuation.

The trap: a rising wedge after an uptrend looks like a bullish continuation channel. It is not — it is exhaustion. Buyers push price up but with diminishing range; the breakout is down.

Distinguishing the Two

The critical distinction is the boundaries, not the slope:

• Parallel boundaries = flag (continuation).
• Converging boundaries = wedge (reversal of the wedge's own direction, which may align with the trend).

Flags have parallel boundaries (70-80% continuation, 1-3 weeks); wedges converge (65-75% reversal against the wedge slope, 3-6 weeks).

Context Determines the Trade

A rising wedge in an uptrend breaks down — a correction, not a trend change. A falling wedge in an uptrend (a pullback) breaks up — a continuation. Match the wedge to the trend: rising wedges favor shorts, falling wedges favor longs, with the prior trend deciding continuation vs. correction.

Entry, Stop, Target

• Entry: close outside the converging boundary, confirmed by volume.
• Stop: beyond the apex or the opposite boundary.
• Target: the height of the wedge at its widest, projected from the breakout.

Common Errors

• Treating a rising wedge as a bullish continuation — it is exhaustion.
• Entering before the breakout close; wedges extend and chop early entries.
• Holding flags past 50% retracement; the pattern has failed.

Flags continue; wedges reverse the wedge. Read the boundaries, not the slope alone.