Generating Some High Tight Flag Developing Ideas

Since the High Tight Flag chart seems to be the best technical trading strategy that one can generate using chart patterns and since the money management strategy that I have developed along with this high tight flag trading system, I thought I would take a post to clearly define what it is and how I screen for ideas.

First of all, Williams O’Neil looked for a doubling of the stock price in less than 2 months, a sideways move of 3 to 5 weeks during creation of the flag with price not allowed to decline 20% from the high in the flag portion. The official definition when the data was tested from The Encyclopedia Of Chart Patterns is different because the criteria was too strict and made it difficult for him to get an adequate sample size. Bulkowski had all stocks that rose 100% in 2 months or less, then looked for a consolidation region close to the 100% gain. At least a 90% gain

Appearance:"A consolidation region of several days to several weeks long after a stock doubles in price."

Please be advised, the book ran calculations of the rise from the buypoint of the flag, rather than the high.
From Bulkowski's Website on high and tight flags."Only buy when price closes above the highest peak in the chart pattern (including the flagpole). That is point B in the Measure Rule figure to the right. Buying sooner risks price never confirming the pattern (in other words, price drops or moves horizontally for months). And yes, I know this is different than what I wrote in my book. HTFs fail too often when using a flag trendline break. Instead, place a buy stop above the highest high in the chart pattern."

Now personally, I don't look to be that strict on requiring a 100% move, a 2 month period, a 3 to 5 week consolidation period.

As long as the stock is performing well and has set up and may offer a buy signal, I want in. For example, I took a trade in VNDA.

I got a little lucky that I made a "mistake" here and sold out early. I reasoned that I could possibly enter lower. The big one day pop the day I bought it was too much, too soon which gave me a huge warning flag and I almost sold it that day. Taller than average candlestick patterns are more likely to put in a temporary high. The next day it failed to rocket significantly higher which to me also meant it may be losing steam. I could have easily thought about a 25% trailing stop but I needed the stock to go to 60% above the buypoint to produce a 20% win and right now I was looking at a 22% gain. The most important thing was that my win rate and win/loss ratio were high enough to profit if I took a profit now that ALWAYS must be answered to avoid making a really bad mistake. The answer was an obvious yes as with a stop around $10 or $.62 I had a Return to risk of around 4.84 and only had to be right around 20% of the time after fees to break even. I knew I had a much better chance than that so at least I can say it isn't a decision that will result in an unprofitable system overall.

Perhaps one could argue that the system on it's own is generally much more profitable if I let my winners run a bit longer. I certainly don't have a problem with that argument. I believe in most cases that the system of high tight flags could theoretically produce more like 30 to 40% on your wins. However, in this case I still feel that the decision to sell was close to right. The reason is, this was more of a short term bull flag in the middle of a strong bull run without much of a consolidation period. As a result you would expect much quicker gains before it tops out much sooner and a lower average return. Considering that in a typical system where one might take a 25% trailing stop you would need the stock to go 60% above the buy point to earn 20%, and my gains exceeded 20%, It has to be at least close to the maximum I could really expect out of this particular trade. Considering it's a biotech, holding it for very long increases chances of something going wrong and it was overbought and seemed to be losing momentum.
I sldo felt short term it could very well offer a pullback to $11 or $12 in which I would consider buying if the set up was right. Once it started going lower I thought I would wait until the price moves above the last candlestick's high. Then it gapped down to below $10 and I considered myself lucky to have gotten out when I did.
Even though the average "perfect" trade is around 65% on high tight flags, considering this didn't meet the criteria I consider it more like 30-40% more accurate. Taking 20-25% on my wins and cutting my losses at around 6-8% seemed like a pretty good tradeoff overall in this case. I also believed even if it were to go much higher I would have a chance to buy lower. I still may do that at some point, even though the chart looks technically damaged for awhile.
The reason I go through this example is to illustrate that you will often be tempted to change your strategy mid-trade and even though I often don't "call an audible", I have learned to reassess and adjust depending upon my odds of the OVERALL strategy. Don't just think "I'm up, I can't go broke taking a profit" because if you don't have a high enough win rate and a high enough profit to your risk, you certainly can short change yourself. In that case, then the trades you win you will convince yourself to not wait long enough to let your winners ride, and the ones you lose you will not cut short. Not to mention you have to overcome the fees. But in this particular example, I made the correct adjustment of identifying that my odds of winning were high enough to justify THIS reward and my given risk (4.84 to 1) with plenty of room to spare. IN addition to that assessment which was correct, I also determined that there was more risk at this point to the downside and found myself able to make a more convincing argument to going short at this point, then long. Even if that were the case, I would not have sold if I was not up so substantially from my buypoint. Instead, I Would have hoped that I could wait through the potential pullback/consolidation and eventually get out higher IF it didn't stop out. If it did, big deal I don't expect or NEED all of my plays to win, but I do need my wins to be enough to outweigh my losses.

This is how one must think when trading. It's not about the current gain, it's about the probability of success, the win rate and structure of the STRATEGY that always must be consistent. So when taking high tight flags, yes they do have an advantage of a strong upside and decent probability of producing a decent gain... but only if you trade them right and only if the past is a good enough indication of the future and only if the fees are not too large of a percentage of your bankroll and only if the trade size relative to your bankroll also isn't too high and only if you can weather the storm of the trades often not working out knowing that eventually if you play the odds for a long enough period of time you will start to gain.
So how does one generate high tight flag trade ideas? I am perhaps less picky than I should be. I know the system is proven one way, and yet I go looking for more opportunities than perhaps I should. Well by doing so I do have a wider selection and then can narrow my search. Nevertheless, I start with a screen that tells me stocks that are optionable and up 50% in a quarter or more and sort by the largest quarterly return. Typically the requirements of a high tight flag should be up 90+% in 2 months and less than a 20% correction with a consolidation range lasting about 3-5 weeks. I instead accept anything up substantially from it's low over 3 months that consolidates at ALL to be close enough to CONSIDER. With a wider list, I am looking for "volume pockets" above of some kind. It takes less effort for these stocks to move and as a result you have a clearly defined exit, higher probability of a quicker move and a more powerful move and a better trade. This creates more unknowns introducing patterns that don't really qualify which is not great, but enough data is known that it is a profitable trade. The other reason that I like a wider variety is because many of these trades are unconfirmed. As such, I can set alerts and once the buypoint is hit, decide whether or not my portfolio is ready to take on a position or not. If not, I can pass knowing another trade will come around the corner in a few weeks or even a few more days. The first set of trades I like because they have some kind of volume pocket above. tan,fslr,ZLTQ,zn,yrcw,hsol,stp,jaso,eng,ift,jks,ggs,asti,plug, gtxi(removed)
yge,esi,cytk,llen,sol,vrml,cnit,dang,tsl,alim,biod,acls,mtor,csun,invn,rmbs,ceco
These trades are at or near all time highs. In other words, minimal price history, minimal resistance. qcor,smrt,staa,acad,rh,evc,ostk,ppc,nxst,pcyg,aegr,regi,dwre,thrx,gtn,isis,cldx,qihu,wtsl,
stmp,mcri,ades,rptp,lgnd,alny,prsc,tear,camp,wwww,irbt,mtsn,bont,tvl,dave,avg,sgbi
Then there are a few more immu,sri,unis
and
vrml,mnkd,psdv,halo,p,bbx,vvtv,amd
(vnda)

There are some massive short squeeze plays that may or may not be a high tight flag: tsla,spwr,acad,thrx,scty,alny
Notice all the solar names overall. I specifically will be watching those with the volume pocket above first. Trading these requires more than just picking some names and buying them, but that's for another time. For now you may want to verse yourself in the high tight flag trading system.