Take the following instrument EllipseTool to represent on the flag a round element. Apply the color FE0000 and the demonstrated parameters:

Illustration of a Mailbox in Photoshop

Blending Options-Stroke

Illustration of a Mailbox in Photoshop

The previous instrument EllipseTool will help to draw on the small flag a round element with the shown parameters:

Illustration of a Mailbox in Photoshop

Blending Options-Color Overlay

Illustration of a Mailbox in Photoshop

Blending
 
Options-Gradient Overlay

Illustration of a Mailbox in Photoshop

Gradient's parameters

Illustration of a Mailbox in Photoshop

Blending Options-Stroke

Illustration of a Mailbox in Photoshop

If everything was done correctly, we'll get:

Illustration of a Mailbox in Photoshop

The final result!

Download PSD file.