TRM, I like your method of making flags, it's probably second best after the cloth flags like AMP carries which can't be beat.
However, when I put up a flag on a model, I add a couple more details if possible, depending on the scale.
On a ship, the flags are not tied through a grommet (hole) at the top and bottom. There are two main ways that the flags are attached.
The more modern way is to have a metal hook, called a Brummel Hook, (after the inventor Isambard Kingdom Brummel - builder of SS Great Britain, Great Eastern and Great Western) which is a sort of circle with a notch in it that can be attached to a similar hook on the halliard, but with ONLY attach if rotated 90 degrees, which can't happen accidentally.
Obviously, you can't have these hooks on ships from before the late Victorian era when Brummel was alove, so the more traditional method is to have a toggle on the upper part of the flag and a short lanyard (or sometimes a loop) on the lower. The flag halyard.(or halliard) has a similar toggle on it's lower part and either just straight rope or a loop on the upper part. When a flag is attached, the toggle goes through the loop (or the lanyard is tied to the toggle) at each end. There is usually no grommets on the flag but a boltrope is sewn inside the hoist (inner part of the flag, often a white strip of fabric to which the coloured part is attached) with the toggle protruding at one end and the lanyard/loop at the other.
The boltrope is easy to make with TRM's method by just putting a bit of thread inside before you fold the two halves of the flag over. The toggle is a bit more difficult, but usually a small, stiff wire will suffice. Tie the "boltrope" around the wire, touch with CA and then trim off the ends to the desired length.
Note also as in TRM's picture that there is always, always, always a block (pulley) at the top of the yard that the flag halyard goes through. TRM also has it right in that the flag is stopped about a foot short of the block so that the flag doesn't get jammed with flapping in the breeze.
There's also a rule of thumb for flag sizes (at least in the old sailing navies) that there should be a minimum of 1" of fly (the horizontal part of the flag) for every foot of the ship's length to a maximum of 1" of hoist for every foot of length. This doesn't apply so much to to motorized ships these days but was still common up until the early 20th century.
