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



Blending Options-Stroke



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



Blending Options-Color Overlay



Blending Options-Gradient Overlay



Gradient's parameters



Blending Options-Stroke



If everything was done correctly, we'll get:



The final result!

Download PSD file.