The second chart example shows the bearish version of a flag pattern in the AUD/NZD and is simply the inverse of a bullish flag. Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a midpoint of the move. If a bull flag is accurate, it will signal the continuation of an existing bull trend and the price will rise once the pattern completes. CF International Inc.’s price chart is a great example of a really tight flag.
– Also, traders of flag patterns would wish to see breakout alongside a high-volume bar, as it is indicative of a solid force that shifts price into a trend that’s renewed. A flag pattern is a term you will come across in technical analysis. The first and the most important factor you should consider in every trade setup is the higher timeframe trend.
One such pattern, the bearish flag, is a vital tool for traders seeking to identify and capitalize on bearish trends. In this comprehensive guide, we’ll explore the bearish bull flag formation flag pattern, uncovering its characteristics, formation, and implications. In a bullish flag pattern, prices continue retracing downward in the form of a channel.
- Flag formations are all quite similar when they appear and tend to also show up in similar situations in an existing trend.
- When bullish flag pattern forms on the price chart then it signals that price will continue the bullish trend.
- After the strong up move, a consolidation phase takes place in a parallel channel majorly in the opposite direction of the flagpole which makes up the flag.
- The flag represents the consolidation phase and the continuation represents the continuation of the original trend.
Bulls are not waiting for better prices and are buying every chance they get. The shape of the flag is not as important as the underlying psychology behind the pattern. Basically, despite a strong vertical rally, the stock refuses to drop appreciably, as bulls snap up any shares they can get. The breakout from a flag often results in a powerful move higher, measuring the length of the prior flag pole. It is important to note that these patterns work the same in reverse and are known as bear flags and pennants.
This high volume of buying causes the price of the security to move consistently higher and higher. This results in a considerable bullish movement in the security’s price, and hence the Bullish Flag Pole is formed. The buy signal on this chart comes when the price action creates a bullish breakout through the upper level of the pennant. In this case you should put a stop loss order below the lowest point of the pennant as shown on the image. One basic rule should be considered when determining the proper stop loss placement for this type of trade.
Trading plan for bull flag pattern
The bearish signal is confirmed when the price breaks down from the lower parallel line of the flag.Now you must have understood how both patterns work. But, the similarity in both patterns is that they both signal the continuation of their respective trends. It is named the flag pattern because its use reminds traders of a flag on a flagpole.
On the question of stop loss, traders typically set the side opposite the flag pattern as a stop-loss point. If you have been interested in flag charts, you will also notice that another term called pennant is often used interchangeably. However, there’s a slight difference between a flag and a pennant.
The pattern has a “flag” appearance because the small rectangle—the consolidation—is connected to the pole—the large and swift move. HPQ provides an example of a flag that forms after a sharp and sudden advance. Remember this line – Now, Our core assumption is – It will eventually give a breakout (or, breakdown) and will continue the trend.
In this example of a bullish flag pattern, the price action rises during the initial trend move and then declines through the consolidation area. So to avoid this situation of consolidation traders usually take entry after the breakout to minimize the holding time period of the trade. While trading in a flag pattern, traders look for a breakout to confirm the continuation of the trend.
If the price keeps on increasing and reaches your second target level, you can choose to close another 1/3 of the position so as to lock in your profits further. If you had bought the currency pair in any of the bull Flags, you would have made profit. The reason is that the price action has maintained an upward trend throughout.
Price Action Trade Management
Flag patterns are easily identifiable on any security’s price chart. Technical traders from all asset classes, such as – stocks, Forex, cryptocurrencies, etc. – commonly leverage these patterns within their overall trading strategy. According to a recent study, identifying this pattern is extremely useful in trading securities that have just issued their Initial Public Offering (IPO).
Flag patterns have five main characteristics:
In addition to these above mentioned methods, you can also leverage complementary tools in technical analysis to determine your take profit targets. Personally, I rely heavily on Fibonacci Extensions for setting take profit targets, and often monitor candlestick pattern formation for making the trade exit decisions. The Bullish Flag Pattern occurs in securities that experience some pullback after an uptrend or a strong run of price increases. This will see a pole formed as prices move up the chart, followed by a brief consolidation during the formation of the flag. As with Flags, there are two types of Pennants – bullish Pennant and bearish Pennant.
What is the Bullish Flag Pattern?
Higher timeframe analysis increases the probability of winning in a trade setup. Without higher timeframe analysis, you may go against the trend even with a bull flag pattern. The reliability of the bull flag pattern depends on the success of the checklist mentioned above. When all components of the bull flag are identified and present within the chart, the bull flag pattern is considered to be a formidable pattern to trade.
To identify a bullish flag pattern, look for a strong upward move followed by a series of lower highs and higher lows. The pattern is confirmed when the price breaks out of this range, typically on higher volume. A flag chart pattern is formed when the market consolidates in a narrow range after a sharp move. Flags can be seen in any time frame but normally consist of about five to 15 price bars, although that is not a set rule.
And if the price action is bearish, the Flag is formed in a bullish direction. If the price action is bullish, the Flag is formed in a bearish direction. If you are doing forex trading, only trade these patterns during the volatile times of day, which are the best times to day trade the EUR/USD. If you day trade stocks or stock futures, then stick to trading during the most active times for the stock market. Flags are created by a sharp price move, followed by a consolidation which runs between—or close to—parallel lines. A breakout can be in the opposite direction of the sharp move, or in the same direction.