How to Trade a Flag Pattern Correctly

How to Adapt to the Time of Day

Have you ever identified a killer pattern, traded it, and then had it fail unexpectedly? It might be because of the time of day.

The trading day is divided into three periods:

OPEN: The first two to three hours are characterized by powerful moves. During this period, the market is all about price discovery. Stocks move quickly; you must trade just as quickly. Most trades during this period are going to be scalps.

MIDDLE: This is the lunchtime slump. Stocks consolidate and retrace, and trading volume diminishes somewhat. Trades that would work during the first two hours, like the flat top breakout and shallow flag pattern, often fail during lunch time.

CLOSE: If the Middle is all about stocks picking a direction, the Close is when they follow through on that. This period is more like the Open, as stocks make powerful moves, but it’s usually a little less volatile.

What works during the open won’t work during the middle of the day, and you can miss out on a lot of gains if you forget that. Today, I traded $TWLO during the Middle period. It showed a great flag pattern that any technical trader would recognize. But it failed, erasing $1000 in gains. Here’s why: I traded it like it was the Open or the Close, not the Middle of the day. The flag was shallow, riding the 9 EMA – the sort of thing I love to play in the morning. But that doesn’t work during the lunch period. At lunchtime, you want to see a deeper retracement, usually down to the VWAP. If I’d waited for that retracement to happen, I could have played the larger flag pattern, I would have had a nice gain to show for it.

Flag Pattern

It was a great reminder that you¬†knowing patterns isn’t enough – you need to know how and when to trade them.