This is how I would do it (and have done it a while back
)
1. mask off everything except where the flags is going to be.
2. paint the flag area white.
3. Keeping the red masked off also mask off your white.
4. draw the flag
*keep in mind the checker flag won't be straight forward squares when you draw it. the squares will deform with the flow of the flag
*Get yourself a reference to make it realistic. I just painted squares on a sheet and made a couple of pics for it, I'm sure you could also google one with the shapes you like)
6. Cut out the black areas.
7. paint it black
8. keeping your red still masked off remove the mask from your flag area.
9. With black (I'd advise transparant) paint in your shadows.
*You'll have soft shadows where the flag just go's up and down a bit. This you can freehand
* you'll have places where the flag folds completely back here you'll have one side with a hard shadow, use a freehand mask, or just mask of the hard shadow side.
10. "Optional" with opaque white put in the highlights (don't over do this)
Little quick pick which I hope makes it a bit clearer: