How To Trade Bullish And Bearish Flag Patterns

After the strong move higher, the market becomes overbought so the market needs to take a “rest”. A small break before the market continues moving in the same direction. The first thing to understand about flag patterns is that they represent consolidation. https://www.bigshotrading.info/blog/what-is-slippage-in-forex-trading/ The rule can be changed if the flagpole is too long for the timeframe you trade in. As the trend can’t exist indefinitely, a reversal will occur anyway. The larger the flagpole, the more likely the price will reverse before reaching the target.

The vertical drop in the asset price representing the pole is followed by a period of consolidation, which resembles a flag. It’s important to point out that a bear flag pattern flag does not need to be a perfect square. The lines of support and/or resistance might angle or slope slightly. Many times bear flag patterns will have support and resistance slopes that angle upward. The main difference between the bull and bear flag patterns is the direction of the trend. The bullish flag pattern occurs in an uptrend, while the bearish flag pattern appears in a downtrend.

The Best Chart Pattern Scanners

Flag patterns start off violently as the ‘other’ side gets caught off guard on the trend move or as bulls/bears become overambitious. On bull flags, the bears get blindsided due to complacency as the bulls charge ahead with a strong breakout causing bears to panic or add to their shorts. Once the stock peaks out, the bears regain some confidence as they add to their short positions only to get trapped again when the breakout forms causing more short covering. A flag pattern is a trend continuation pattern, appropriately named after it’s visual similarity to a flag on a flagpole. A “flag” is composed of an explosive strong price move that forms the flagpole, followed by an orderly and diagonally symmetrical pullback, which forms the flag. When the trendline resistance on the flag breaks, it triggers the next leg of the trend move and the stock proceeds ahead.

I hope this lesson has provided you with a blueprint of what to look for when identifying bullish and bearish flag patterns. An understanding of pattern psychology may help traders grasp the concept in a straightforward way. The flag formation starts with a significant price movement that forms a solid trend. However, the trend can’t last indefinitely, so the price starts correcting. Bulls in a downtrend and bears in an uptrend try to turn the price around; however, if there are no fundamental factors for a trend to reverse, the trend recovers. While specific candlestick patterns are not inherently part of the bear flag pattern, traders can benefit from analyzing candlestick formations within the pattern.

How to Trade Bull Flag Pattern

After the initial selloff, people who missed the train will panic and begin selling. Chasing prices lower after a breakout hoping to catch a piece of the action is always a bad idea, for several reasons. SuperMoney.com is an independent, advertising-supported service.

In this case, the rebound didn’t even manage to extend to the first Fibonacci retracement level of 23.6% before the sellers were successful in pushing the action lower. Hence, the overall downtrend usually dictates the power and pace of a rebound. Harness the market intelligence you need to build your trading strategies. The flag pattern isn’t as well-defined as the other examples, but it still gives us a nice channel with an accurate measured objective.

What constitutes a bear flag pattern?

A high-volume breakout is a suggestion that the direction in which the breakout occurred, is more likely to be sustained. The bear flag and the bear pennant are chart patterns used to identify bear markets. They both appear as downward-sloping trends that are followed by a brief period of consolidation before the price continues its decline. Both patterns indicate bearish activity and can be used to anticipate potential reversals and prepare for short positions.

It is formed when there is a sharp sell-off followed by a period of consolidation. The objective of trading this pattern is to catch the next leg down in the trend. Once you entry a flag pattern, the targets can be derived from many indicators. The initial targets on all flag patterns will be the high or low of the flagpole. If the flagpole price peak is exceeded, then you can use Bollinger Bands and or fib price levels. To get fib price level targets, first plot the high to low and low back to high price levels of the flagpole.

Start with the Basics: What Is a Flag?

The former is constituted after the price action trades in a downtrend, making the lower highs and lower lows. Once the new low is in place, the price action starts to rebound higher as the sellers take a breather. This consolidation takes place within a parallel channel, unlike in the bearish pennant where the consolidation is formatted in a wedge or a triangle.

The biggest risk of trading a loose bear flag is a 55 percent chance of the pattern failing. Traders must ensure they identify a better-performing flag pattern with a higher success rate or the trade may fail. Two decades of research by Tom Bulkowski show that after a Bear Flag Pattern is confirmed on a price breakdown, there is a 45% chance of a successful trade averaging 9%. The flag is tight, meaning there is a close-fought battle between buyers and sellers over a period of days. Finally, the buying pressure is so strong that the price breaks upwards, and an explosive rally averaging +39% ensues.

A Bear Flag Trading Strategy (a template you can use)

The bear flag pattern is considered a reliable pattern in technical analysis. However, it is important to remember that no pattern guarantees a specific outcome. Traders should always use the bear flag pattern in conjunction with other analysis tools and indicators to increase the accuracy of their predictions. One of the first experiences most day traders learn when they start trading is price action trading.

The flag indicates a bearish bias and that the asset price will break further to the downside. The pattern emerges after a vertical drop in the asset price, which forms the pole, followed by a period of consolidation that forms the flag. Bear and bull flag patterns do not appear in every trend, but when they do, they present opportunities for trade execution. Every trader has a specific way of executing trades; consequently, how the bull and bear flag patterns are traded differs from one trader to another.

What is the success rate of a bear flag?

Price action breakouts can occur in either direction, but the chances of a trend continuation remain high with a flag pattern. This means the bull flag breakout can trigger a bullish trend continuation, and a bearish flat breakout point can drive a solid downtrend. To determine the entry point for sellers in a bear flag pattern, the pole height is subtracted from the breakout price. This occurs when the asset price slices below the lower boundary of the flag.