Flags and pennants are very short consolidation periods that appear within a fast moving trend. Both are preceded by a sharp move that is nearly a vertical line,

and both show consolidation against the direction of the trend.

The flag is a pattern formed by two parallel lines sloping against the trend, while the pennant is a pattern of two converging lines that appear very similar to the triangle or the wedge formation.

The downtrend of EUR/USD started since Mar2005. There was a plunge at the end of May, and then it started the consolidating period, which was represented by the flag pattern. Notice the flag sloped against the dominant trend on the chart. At the beginning of September, the trend resumed after the price fell below the flag.

As with the previous patterns we have discussed, the breakout signal on a flag or a pennant almost always occurs in the direction of the original move, and when the market breaks out it usually moves decisively to continue the trend. Of course, since the pennant formation is in the shape of a triangle, it does fall into the category of triangles that has been previously discussed. What distinguishes the pennant, though, is the speed with which the market moves both before and after the pattern is created.