Bull Flag Patterns: What Investors Should Know

The bull flag pattern is built around human psychology. Once you see and understand the bull flag pattern, you can take advantage of it because human nature drives it. Then, after the period of consolidation, the upward trend continues. Once the new breakout begins, it’s a good idea to wait for confirmation. It’s also a good idea to have a price target for getting out of your position.

It is important to note that these https://trading-market.org/s work the same in reverse and are known as bear flags and pennants. Bull flags typically begin to surface in conjunction with a new market rally. A bull flag is bullish because it signifies a continuation of a powerful uptrend.

Now since this is a trend reversal strategy, you’d want to look for downtrends. I’ll share with you practical trading strategies that will answer all of these questions. Therefore telling you that an uptrend is about to occur potentially.

A Bull Flag Pattern Trading Strategy — A Complete Guide

The point where the price movement breaks that of the flag is generally when traders place their orders. The length of the flag pole is typically used to calculate the profit target, though a more conservative strategy is to use the height of the flag pole instead. Even though flags and pennants are common formations, identification guidelines should not be taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline. Without a sharp move, the reliability of the formation becomes questionable and trading could carry added risk. Look for volume confirmation on the initial move, consolidation and resumption to augment the robustness of pattern identification.

It is called a flag pattern because when you see it on a chart it looks like a flag on a pole and since we are in an uptrend it is considered a bullish flag. These lines can be either flat or pointed in the opposite direction of the primary market trend. The pole is formed by a line which represents the primary trend in the market.

DAY TRADING: Bull Flag Pattern

This material is not intended as a recommendation, offer, or solicitation to purchase or sell securities, open a brokerage account, or engage in any investment strategy. JSI uses funds from your Treasury Account to purchase T-bills in increments of $100 “par value” (the T-bill’s value at maturity). The value of T-bills fluctuate and investors may receive more or less than their original investments if sold prior to maturity. T-bills are subject to price change and availability – yield is subject to change.

Also, with this strategy, you don’t have to track the price dynamics. Let’s look at some strategies implemented to trading the bull flag. You can close the position based on the length of the flagpole.

What Happens with a Failed Bull Flag Pattern?

The abovetrading exampleshows a 130p rally ( p) followed by a 70p flag decline ( p), followed by a repeat 130p rally ( p). Once the shares break out from the flag, it is possible that another rally – the same size as the first – could be delivered. He is the most followed trader in Singapore with more than 100,000 traders reading his blog every month… I want you to promise me that you will do your work by tweaking, backtesting, and demo trading these strategies consistently first before risking your hard-earned money. Because it would tell us that the level isn’t sustaining pretty well, and it might be a false breakout instead. Again, you must be already familiar when it comes to plotting support and resistance.

Let’s look at some examples of bullish flags appearing on price charts in order to illustrate the concept and how they appear visually. A bullish flag appears like an upright flag on a price chart, with a rectangular price pattern marking the flag itself. Joey Fundora has 17+ years of experience as an independent stock trader, specializing in discretionary swing trading through technical analysis.

A lower volume signature should accompany the price action within the flag. A breakout is when the price moves above a resistance level or moves below a support level. The price movement of a breakout can be described as a sudden, directional move in price that is… The initial rally comes to an end through some profit-taking and price forms a tight range making slightly lower lows and lower highs. The pattern formed by inverting the bull flag stock pattern is called the bear flag stock pattern.

Two Trade Stop Loss Spots

Finally, I suggest using a tight trailing stop loss such as the 20-period moving average. With this strategy, your technical analysis skills will be tested. Now, what you want is for the price to be above the 50-period moving average. That’s why if you spot a sharp move down after the pole has formed, it will take a while for you to confirm that the sellers have not yet taken over.

Therefore it’s crucial to continuously educate yourself and seek independent advice if necessary. The entry flag point is also easy to find — you’ll see the triangle or rectangle, from which the price breaks out. The exit target price is similarly easy to identify by the length of the flag pole. Overall, both are bullish patterns that facilitate an extension of the uptrend.

A bear flag pattern is characterized by an initial sharp decline and then a period of consolidation. With most bear flag patterns, the volume increases when the pole is being formed, then remains at its new level. Volume typically does not decline during the consolidation period as downward trends are often a vicious cycle driven by investor fear over falling prices. As such, the volume is upwards as the remaining investors feel compelled to take action. In the bull flag patterns, for instance, the flag pole is formed first.

The take profit is measured by simply copy-pasting the flagpole from a point where the breakout took place. Some traders prefer to use the starting point to copy-paste the trend line where the breakout move initially started i.e. within the body of the flag. While both are generally acceptable, we advise you to use the breakout point to copy-paste the flagpole. Flag patterns are considered to be among the most reliable continuation patterns that traders use because they generate a setup for entering an existing trend that is ready to continue. Flag formations are all quite similar when they appear and tend to also show up in similar situations in an existing trend.

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A bull flag formation means that there is a pause, albeit brief, in the upward momentum of a stock’s move to higher prices. It indicates that the stock might be in a temporary overbought condition, which will likely bring in some early selling pressure in a young bull run. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. A Pennant is basically a variant of a Flag where the area of consolidation has converging trend lines, similar to a Triangle.

TradingView can automatically measure a bull flag pattern to set a price target. Alternatively, to measure manually, use an arithmetic chart and plot the length of the flag pole. This distance will be the future price target which you should annotate on the chart in the direction of the breakout. The primary benefit of trading a bull flag is that it can allow traders to enter the market at a low-risk point. The tight bull flag setup provides a very limited downside risk and usually produces strong returns when successful. Additionally, traders may be able to identify the target price before entering the trade, allowing them to manage their position better.

It is an indispensable resource for traders and investors looking to increase their profitability by taking advantage of stock chart patterns. A high-tight flag is a bullish pattern where buyers bid up the stock in a vertical direction, even at high levels. The flag is tight, with buyers and sellers in a close-fought battle for days. At last, the buying pressure is so strong that the price breaks upwards and averages a 39% rally.

In addition, we looked at the differences between the bull flag and the bearish flag. You won’t confuse the bullish flag pattern with other patterns thanks to the characteristic flag pole. This is why this pattern is easy to identify in the chart. The descending triangle is a chart pattern used in technical analysis.

This pattern forms when the price makes a sharp move up, followed by a period of consolidation, creating the shape of a flag with two parallel trendlines. The high-tight bull flag pattern is a reliable chart indicator, with success rates of 85 percent during a bull market. A high tight bull flag is a good reliable pattern with an 85% success rate and a 39% average increase. Do not trade loose bull flags, they have a 55% failure rate, and even if they succeed, they only average a 9% price increase.

• The flagpole forms on an almost vertical price spike as sellers get blindsided from the buyers, then a pullback that has parallel upper and lower trendlines, which form the flag.
• Read on, and you will learn the answers to these and many other questions related to the oennant price chart pattern.
• Let’s have a closer look at the bull and bear flag patterns.
• Ultimately they are one of many indicators, which may, in the majority, be pointing the other way.
• Also be aware the trading volume tends to drop during the flag or consolidation period as traders buy and sell within a small price range.

Buy the break of the first candle to make a new high above a prior candle. From basic trading terms to trading jargon, you can find the explanation for a long list of trading terms here. Banking services and bank accounts are offered by Jiko Bank, a division of Mid-Central National Bank. Learn Browse our latest articles and investing resources. Automate your investment strategy with recurring investments. Endurance is one of the most important qualities of a trader.

Why Most Bull Flag Patterns Fail

If you don’t have a trading platform yet, try looking on a website like Yahoo Finance or BigCharts. Here are three bull flag patterns I think you can use to your advantage. Keep in mind this back and forth goes on for a while — hence the consolidation. Also be aware the trading volume tends to drop during the flag or consolidation period as traders buy and sell within a small price range. The bull flagpole forms when there’s a big upward movement in price. One of the most important concepts I teach my Trading Challenge students is to know the catalyst.

The bull flag pattern trading is quite a straightforward process as long as the previous phase – spotting and drawing the formation – is done properly. As outlined earlier, the bull flag gives a shape and formation to the uptrend and it helps traders to determine entry and limit levels, which is exactly what we are going to do now. Following the creation of a short-term peak, the price action starts a correction to the downside. While no one knows whether the market rally will continue or reverse, traders should follow price action and let the probabilities take care of the rest. While all chart patterns are susceptible to false signals and surprise moves, bullish flags are among the most reliable and effective patterns.

Using the second trendline stop-loss may be more costly but it avoids wiggles at the first trendline from triggering premature stops. To offset some of the risk, lighter shares can be used when trailing the second trendline stop-loss. The bear flag is an upside down version of the bull flat. It has the same structure as the bull flag but inverted. The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower trendlines, which form the flag.