How to Trade Flags and Correct Moves
Hello traders. Welcome to the scalping course and the third module, Scalping Setups. In this lesson I’m going to teach you how to trade corrective moves and flag setup and the cool thing about this is that up until now we have taught you how to trade setups that would only occur once or twice per day, it doesn’t matter because that is the part of being a scalper, you’re looking for those setups but you’re also looking for the setups that you’re going to learn now that can occur more times during your session and that have smaller profit targets but also smaller stop-loss level.
The reason that they have smaller targets is because we are only focusing on trading with a trend and we’re taking profit at very important levels or historic levels. We’re going to start a chart and we’re going to go through a couple of sessions and I’m going to show you what a flag looks like, how to trade it, where to put your stops and where to take your profits. All right traders, this is the Euro-US Dollar three-minute chart and this is one session. Let me just correct this vertical lines that point out where the session starts and ends, and of course the start of the session is this one right here. This is Sunday’s session as you can see right here, and even on Sundays we can scalp the market for a few tricks or a few PIPs. I’m going to start with this Sunday’s session and I’m going to move forward through Monday’s session.
The first thing you need to notice is that we made this high and that we are now currently in a down move because we want to close this gap, or price wants to close this gap. This first thing you want to do is notice the actual trend in the session and as you can see, we are now in a down move. You are going to look for a corrective move to the upside and you are going to draw trend lines for this corrective move in a shape of a little channel. This is what a flag looks like and this is how you’re going to trade it. You can see that we have the pole of the flag, which is the move to the downside, then we have the corrective move to the upside and then we have the flag breakout.
What you need to do and because this is a moment trade also, you don’t want to be manually trading this breakout. What you want to do is you want to put your pending order, let me just grab my rectangle, and I’m going to show you a zone of the pending order. Here is the zone where your pending order is going to be at. You can see that the pending order is actually a few PIPs below the previous low and the reason that the pending order is a few PIPs below the previous low is because we just don’t want to break off the sending channel but we also want to break the previous low, meaning that the corrective move has come to and end. Of course, we want a pending order because price can do like it did in this candle, move all the way down but close inside the channel, meaning that the ascending support of the channel has been tested and we are still at the corrective move and the break is going to go higher. When this happens just move your pending order. If your pending order was here, you would move it right here, and so on. This is your pending entry and your stop-loss.
The most conservative way to put your stops above the previous high, but remember that we are scalping the market and even though this is a 10 PIP stop-loss, we do want to make sure that this is a true breakout. We don’t have to risk 10 PIPs in order to know if this is a true breakout or not. What you want right here is you want a continuation of the trend and the price might break with a flag and come back and re-test the previous base or the previous ascending support like it did right here. You can see that price came all the way– I’m sorry, let me just put right here and broke and came back to re-test this level and this is called KYM or Kiss Your Mama.
You can look for the definition of KYM in the Price Action Course. But this is just a re-test of previous broken levels and you want to put your stop-loss above this levels because if price comes above, for example this level right here, let me just color it a shade of red, if price comes above this levels, it would mean that this was a false breakout and that you should get out of your chart position, meaning that on this trade you are risking five PIPs.
The first thing you are going to do is you are going to have a measure target for this flag breakout. The first measured target is going to be from the flag low to the flag high, and you can see that you have 11 PIP measure target and those are going to be your actual targets, from the short entry right here, to about right here. Right here we have 11 PIPs and as you can see at the bottom of this ruler box, so our target should go all the way down here. And you can see that when this flag breaks we actually get filled on our target for an 11 PIP win on a better than 1:2 risk-to-reward ratio. This is how you’re going to be trading flags, you’re going to first of all, if you’re in the middle of your session of course, you’re going to look for the market direction or the immediate trend of the market. Then you’re going to look for this corrective channels to the upside, if we’re in a down trend, and corrective channels to the downside if we are in an up trend.
Now after that you’re going to position your pending order which goes below the previous low and below the channel, and you’re going to position your stop-loss level and you’re going to calculate the stop-loss level, and you’re going to calculate then your profit taken by calculating the low of the channel to the high of the channel and then extrapolate that to the actual break-out zone or the entry area for your profit taken.
As you can see, we make 11 PIPs with this flag breakout on a Sunday where the volume is very thin. If we come back to Monday trading, you can see that the actual trend of the session is up, up until now the trend of the session is up. The first flag that you can notice is this flag right here. Flags can be a very slow channel, or they can be actual moves to the downside like this one right here. You can see that from the low of this candle to the low of this candle we do have a flag right here. We have a breakout here but this candle doesn’t break super hard, but we do have a breakout, and you can also use your trade-in knowledge to look back at this area being tested right here. You can see that this highs are also being tested at the end of the flag. You don’t have a breakout yet but you do have a pending order and your pending order should go above this highs right here, this is your entry target, and when price moves up on this red candle, you get filled. I’m going to use a rectangle also for your stop-loss zone, your stop-loss zone should go below this low, which will mean that you have a very small 5 PIP stop-loss.
Let’s calculate the length of this flag right here, you can see we have 16 PIPs, so what we’re going to do is we’re going to extrapolate 16 PIPs from the entry area to our actual targets, which are right here. As you can see, we have a better than the 1:3 risk-to-reward ratio on this trade that makes 16 PIPs. Here is how you can play, I like to play my flags safely. Sometimes I’ll let the rest of the position open, sometimes I want, but if you want to leave the rest of the position open, that’s up to you but you need to know how to hold your trades. For example, if half of your position gets filled here on a win, you are going to move your stops to break even right here. Then, you are going to wait for price to make a low.
When price makes a base, just as this ones right here, and breaks with the previous high, you are going to move your stops below this low and by doing so you will be locking in 11 PIPs. Remember that the reason you are holding all this straight is because you want to make more PIPs than you did with the previous half of your position, so it doesn’t make sense to close the trade right here, you need to wait for a new high.
When price makes this high and then makes this low, you are going to move your stops to this low right here and as you can see, you get stopped out again when price tests again this high and moves back down, but by doing so, you made 27 PIPs on the second part of your position. The reason you are going to be trading your stops so tightly is because this can happen, during your trading session price can come down immediately erasing all of your gains. You are going to be taking profits on a calculated target and then if you want to leave your targets open, you are going to trade your stops very tightly like I just showed you. And of course, if the market reverses like in this case, now you’re going to be looking for flags on the bare side of things.
We are scalpers, the overall direction of the market is of no importance to us, we just trade the immediate direction of the market, of the immediate trend and in this case it was an up trend and when price breaks with this up structure and then reverses, we are going to start to look for various flags just like in this case and we are going to do the same all over again, all throughout our trading sessions. That’s the third setup you are going to be looking for, so now you have the overall 61 8 and 76 for daily retracement, you have the break of previous daily’s highs or daily’s lows, plus the flags that you are going to be trading. That gives you three setups to look for on your trading sessions, but just wait for a minute because I’m going to show you another three on the next lessons.