Intraday flag construction with breakout and stop rules

Four conditions to check on the chart

Editorial interpretation: a flag-and-pennant hypothesis is easier to falsify when the pole, the consolidation, the breakout, and the stop are checked as separate conditions on the chart, before a trade is imagined.

The historical workflow can code pole, flag, and flag-breakout as separate boolean functions so each construction step is independently true or false on the current bar.

How the flag is specified

In this construction, a flag-and-pennant is a compact, roughly horizontal consolidation after a steep pole, with limited depth versus recent range, used as the chart condition to test.

A pole is the steep prior run, measured as a multiple of average true range over a short bar count. A flag can be specified mechanically as a steep pole of A times ATR in B bars, followed by a roughly horizontal consolidation that breaks out in C bars or less from the pole top.

Flag depth can be constrained so the high-to-low range of the consolidation is no more than D times ATR. An uptrend over the last E bars leading into the pole can be required as a construction filter before the flag is treated as valid.

Breakout, entry, and exit construction

A breakout is the first close or bar that leaves the flag in the pole's direction within a limited number of bars from the pole top.

A long-only construction can buy the next bar after a flag breakout and exit by time, profit target, or stop-loss.

The same pole-flag-breakout rules can be applied on intraday bars and, with parameter changes, on end-of-day bars.

Stop and target construction

A stop-loss is a pre-set exit that bounds loss, typically referenced to the flag low or that level less a volatility buffer.

A stop placed at the flag bottom can exit too early; subtracting one ATR from that level is proposed as a more robust stop construction.

A price-target exit can be defined so the close, not merely an intra-bar high, must exceed the target before the position is closed.

Lookback and bar scale

Lookback-to-flag is the bar window after the pole top in which a valid flag and breakout must appear.

The lookback used to pair poles with flags changes which setups are found; a shorter lookback can identify adjacent flags that a longer lookback of 50 misses.