Adding flags and banners is a big part of making ships or rank-and-file troops look the part on the battlefield. Not only do these add unique bits of color to the battlefield, but they are also a rare opportunity to model movement into your otherwise static models.
For my scratchbuild projects, I wanted to settle on a solid and reliable method for making flags, especially for smaller scales such as 3mm in the case of my 1/600th scale ACW ships and troops. I also decided against using flags printed on paper because they didn't offer the sort of dynamic movement of the fabric that I wanted to capture. So I knew straight away that that was going to require hand painting the details or using decals (for larger projects). So to that end, I've hit on the following method.
In the early days I used a bit of wire to act as my flagpoles, but what I found here was they were too rigid and often bent over or sheered off my flag if they were bumped. I was having the same issue with my 1/1500 scale ship masts, so I started looking for other, more forgiving materials to use instead. I ended up settling on these artificial pine tree garlands as their needles are a consistent diameter, are sturdy enough not to crimp if folded, and are flexible enough to bow under pressure and not sheer things off (like paint or flags) as easily as the wire. (If you want to know more about how I used these as masts, check out my article about that here...)
Using a small pin, I bored a pilot hole into the bow of the ship where I wanted the flag to sit. For other locations, such as with infantry, I used a pin vice to drill out a hole in the base. In both cases, the anchoring hole gives the flagpole excellent support to protect it from flicking off and getting lost.
In the distant past, I've used tissue paper, but that was difficult to decorate without the colors bleeding together or tearing. Furthermore, at this scale, paper isn't an option because it is too hard to shape. A while a go I used some aluminum foil to make some flags for another project and they ended up looking very good but were too fragile and ended up ripping.
I ended up going with a small square of aluminum from the top seal of a food container, in this case sour cream. This material is heavier than foil sheets and some are even textured, which came in handy when I was modelling rolled-up sails. I will immediately glue the flat flag straight onto the flagpole with a touch of superglue. If I were using decals, I would then prime and basecoat the flags and apply the decal while it was flat, then move to the following step.
For my project I knew that I was going to hand-paint the flags, so once they were glued to the poles I use a pair of tweezers, (or a couple of toothpicks) to pinch and twist the flags carefully into shape. Note that some flags will come loose, so just touch them up with a little more superglue and come back to them later. I aim to make sure that the folds are little varied, but all waving the same direction across your whole army/fleet/etc.
Just a quick note on flag directions on ships, keep in mind that with ships that travel faster than the wind should have their flags waving behind the flag, but those ships that sail slower than the speed of the wind should have their flags waving in front of the mast in the direction the wind is blowing. Think of a windsock when positioning them.
Once all the flags are on the model, I'll paint everything up, being careful to prime the metal flags so that the paint doesn't chip off. When hand painting, I tend to abstract out some of the flags details to a certain extent, such as stars or scrolling, battle honors, etc. Instead I'll try and make sure that I'll use a stroke of paint to suggest the detail rather than try and bust your eyesight making it look super realistic. Just chose what level of detail you best feels captures the essence of the scale you're working in.
I will tend to paint the banner first followed by the flagpole. This allows you to be slightly more messy when painting the banner and then tidying up the edge when you paint the flagpole.
You can use these steps for projects other than ships. I've also applied the same method to my 3mm American Civil War infantry.
So that's how I handle my flags. Once you've done a few the process starts going smoothly. One last trick that I've been using for hand-painting the flags, is to hone in my brushing skills on scratch paper and then batch painting flags so that you can retain your muscle memory through out the process.