How to Trade a Bearish Flag Pattern

For instance, a flag pattern can be seen as more reliable when accompanied by a corresponding signal from the RSI (Relative Strength Index) technical indicator. If the asset continues to move in the consolidation direction, it is doubtful that the chart would create a bull flag pattern since the flag pole trend has reversed. On the other hand, if the asset moves toward the flagpole, a bull flag pattern has been detected. Flag patterns begin forcefully when the trend moves off the ‘other’ side guard or when bulls/bears become overconfident. Bull flags blindside bears owing to their complacency, as the bulls race forward with a big breakout, leading bears to panic or add to their short positions.

Even when a flag pattern is readily apparent, there is no certainty that the price will move in the anticipated direction. This is particularly true in the case of the cryptocurrency market, which is far more volatile and unpredictable than conventional asset markets. 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. What separates the flag from a typical breakout or breakdown is the pole formation representing almost a vertical and parabolic initial price move.

During this period of consolidation, volume should dry up through its formation and resolve to push higher on the breakout. The actual price formation of the bull flag resembles that of a flag on a pole hence its namesake. Additionally, bear flag patterns should always be confirmed using other indicators, like the RSI. Eventually, the price broke out of the range of this channel in a downward direction and dropped to the bottom point of the earlier flagpole.

Bull flag vs Bear flag: What They Mean in Cryptocurrency

That is why it is essential to wait for the fulfillment of the breakout conditions before setting your trade signal. The size of the flag pattern matters a lot and will decide the eventual outcome and the time it takes to achieve this outcome. Size can be looked at from the standpoint of the pole’s length or the size of the consolidation area.

It takes the shape of a flag when the highs and lows of the price bars/candles within the consolidation area are joined with independent trend lines. You can observe the pattern in any time frame, whether it’s daily or intraday. You are looking for a series of green candles followed by a stall of some bear flag vs bull flag sort without retracing the move that brought the price up to these levels. You have to have an entry and exit strategy based on the pattern itself. It is hard to put a probability on the pattern; however, understanding why and how the pattern forms allow traders to navigate the patterns successfully.

Can a Bull Flag Pattern Fail?

Hence, when trading the bearish flag pattern, traders can exit the market at the closing candlestick’s price at the breakout level. However, when trading the bullish flag pattern, traders can enter the market at the opening candlestick’s price at the breakout level. A bull flag is a bullish continuation pattern that appears during an uptrend. Traders use technical analysis tools to identify downtrends, such as moving averages, trendlines, and chart patterns. Downtrends can provide traders with opportunities to profit from short-selling, which is selling an asset at a high price and buying it back at a lower price. In summation, the bull and bear flag patterns are great tools for traders when day trading or swing trading.

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• A bull flag is a bullish continuation pattern that appears during an uptrend.
• Flags are continuation patterns that allow traders and investors to perform technical analysis on an underlying stock/asset to make sound financial decisions.
• One of the best things about the bear flag chart pattern is that it is easy to trade.

Though the following breakout does not always feature a high surge in volume, an increase in volume can show that there has been an influx of new buyers. A bull flag is a continuation pattern that occurs as a brief pause in the trend following a strong price move higher. The bull flag chart pattern looks like a downward sloping channel/rectangle denoted by two parallel trendlines against the preceding trend. In a cryptocurrency chart, watch for a strong upward price rise followed by a shallow and orderly sideways swing to pinpoint a Bull Flag. Support and resistance lines on the flag should be parallel, and the pattern should be short-term, ranging from a few days to a few weeks. During a consolidation, volume often decreases, implying that traders affiliated with past movements have less urgency to purchase or sell.

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When all components of the flag pattern are correctly identified and present within the chart, this particular pattern is considered as an inspiration to trade and make informed decisions. In this example, price does not quite reach this level but this is purely a guideline. Trader’s need to be aware of price movements and other fundamental and technical moves that may occur throughout the trade journey. – Investors who’d rather avoid risky trades will have limited opportunities to make a huge profit when using this chart pattern. – Once you have identified these two parts of the pattern, you can then look for a breakout to the downside from the consolidation phase. This is typically signaled by a move below support or a forming bearish candlestick pattern.

The strong directional move up is known as the ‘flagpole’, while the slow counter trend move lower is what is referred to as the ‘flag’. The amount allocated to each trade and the number of trades in a day can significantly impact a day trading strategy. Knowledge of such patterns can save you from costly mistakes and enhance your trading strategy. One popular approach is to combine flag patterns with the Relative Strength Index (RSI) indicator.

This will depend on the time frame in which the pattern is identified. A bear flag detected on a 5-minute or 15-minute chart typically resolves within a few hours. In contrast, a bear flag seen on a 4-hour or daily chart may take some days to resolve fully. Typically, the volume pattern within the flag’s consolidation area indicates the power of the market players.

Is Bear Flag a Reliable Indicator?

It indicates a situation where buyers are in control and are pushing the price but have to contend with contrarian forces midway into the move before they have their way. When the price is in consolidation, the buyers tend to have more volume than the sellers. This signifies an accumulation of buying volume, eventually sending the price out of the flag and toward the finish line. Here, we can see that there was a double candle closing penetration of the bear flag’s lower border, fulfilling the time filter parameters for a breakout.

When the price of a stock or asset swings in the opposite direction of the long-term trend, these patterns occur. This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you.

In terms of managing risk, a price move below the support of the flag formation may be used as the stop-loss or failure level. In an uptrend a bull flag will highlight a slow consolidation lower after an aggressive move higher. This suggests more buying enthusiasm on the move up than on the move down and alludes to the momentum as remaining positive for the security in question.

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.

Flag patterns can be used to identify the likely extent of the continuation of a sharp trend after the price has briefly consolidated or traded against the original trend. Remember to use a combination of different https://g-markets.net/ technical indicators and market analysis techniques to confirm your trade signals before entering any positions. Also, always use risk management tools such as stop-loss orders to protect your capital.

Once you grasp the concepts behind bull flag vs bear flag patterns, spotting them becomes a simple task. For instance, when looking for a bullish flag pattern, start by identifying the flagpole, which represents the initial price increase. Next comes a period of consolidation, during which prices may fluctuate slightly downward or sideways. Finally, watch for a breakout and a continuation of the bullish trend, completing the pattern. The bear flag and bull flag represent the same chart pattern, however they are reflected in the opposite direction. Both bull and bear flag patterns entail a flagpole, consolidating price channel and a take profit projection measured from the length of the initial flagpole.

Bull flag vs. bear flag – how to trade them

The flagpole signals the initial price surge, while the flag is a consolidation phase. Identifying the level, entry point, and target requires careful analysis and decision-making. You can check this video by our trading analysts on how to identify and trade the bear flag pattern with real-time examples.