What Are Bull Flags and Bear Flags and How to Trade Them

A lot of times a stock will reverse and it’s because the dark pools have placed a large order. You can still profit from this information by looking for a potential break out in the opposite direction. If there’s a pattern failure, take a step back and see if you are looking too closely and that maybe this is just part of a larger pattern. We have some slightly increased volume prior to a pole and then the volume is decreasing. The flag generally moving back up as we would expect for a bear flag, and we will have a similar decrease (the size of the flag’s pole) that we can profit on. To manage your risk, you may place a stop-loss order above the resistance line of the flag at, say, $2,900.

Look for high volume on the breakout because then your bear flag has failed. To minimize potential losses, some traders may also place a stop-loss at the flag’s base, the consolidation phase’s lowest point. This will limit the potential losses if the price moves against the trade.

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The larger the flagpole, the more likely the price will reverse before reaching the target. In this case, you may consider using trailing take-profit orders and close your trade partially. A fakeout is a market situation whereby a price breaks beyond a certain level but doesn’t stock bear flag continue moving in this direction and then reverses. Flags are relatively simple patterns; therefore, they are widely used, even by traders with little experience. This FXOpen guide will inform you about the psychology behind these formations and their standard trading rules.

Should the trend resume, the price increase could be rapid, making the timing of a trade advantageous by noticing the flag pattern. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.

How to Trade a Bearish Flag Pattern?

We used the top of that resistance line to set our stop-loss orders (SL) and essentially wait for the price of the stock to fall below our support line. Once it fell through, the bearish flag had been confirmed and this point acted as our entry point (EP). After we have entered our short position, we can draw a line down from our entry point to determine our take profit point (TP).

We get another smash that will make many people chase the move to the downside again. If the price forms a Bear Flag, then you can short the break of the swing low. 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. Trade up today – join thousands of traders who choose a mobile-first broker.

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The increasing or higher than usual volume accompanying the downtrend (flagpole), suggests an increased sell side enthusiasm for the security in question. 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. The chart above shows the bull flag on an hourly chart of the EUR/USD pair.

• No representation or warranty is given as to the accuracy or completeness of this information.
• Whilst chart patterns certainly provide traders with a statistical advantage, they in no way guarantee a successful trade.
• Commentary and opinions expressed are those of the author/speaker and not necessarily those of
  SpeedTrader.
• If you’re not confident about applying bull and bear flag patterns to real-world trades just yet, Phemex offers a fantastic paper trading platform that you can use to hone your skills.
• As you can see in the figure below, after the market makes a strong down move, it enters into consolidation – a very narrow range – to adjust to the new lower prices.
• We’ve done something different with the Bear flag chart pattern strategy.

While flag formations are fairly easy to spot, implementing a flag pattern trading strategy isn’t always simple. To maximize the benefits of flag patterns, it’s important to focus on entering and exiting trades swiftly, as flag patterns typically last only a few days or weeks. Additionally, flag patterns can be prone to whipsaws; conservative traders should employ sensible stop-loss and take-profit levels to ensure their capital isn’t overexposed. When attempting flag pattern trading, focusing on larger cap stocks and ETFs may improve success rates due to greater liquidity in these markets.

Bear Flag Pattern Strategy – Sell Rules

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. After you have located the flag pole you should begin to identify a range of consolidation in the price of the security.

Remember to use a combination of different 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. – After the sell-off, the price will enter a period of consolidation. This is typically marked by lower volume and tighter trading range. As mentioned earlier, the bear flag is a bearish continuation pattern.