Bear Flag Pattern and its Meaning in Trading

It may be challenging to trade when you are a beginner and aren’t aware of how to spot trends. Spotting uptrends and downtrends are one of the most important tasks of a trader. Determining a trend enables selling or buying stock, and thus, getting profit.

Identifying trends and their strength is possible with the aid of indicators and specific patterns. For example, one of such patterns is the topic of this article — a bear flag.

The bear flag pattern occurs before the continuation of a bearish downtrend. Then this downtrend is followed by a pullback which is considered a temporary price reversal.

Spotting such market behavior is critical to meeting investment objectives. That’s why every trader should learn how to recognize a bear flag pattern. Keep reading the article to learn more about the topic.

What is a Bear Flag?

So, what is a bear flag? A bear or bearish flag is a candlestick chart pattern reflecting a continuation of the downtrend once the temporary pause is over. Since it’s a continuation pattern, it means that the bear flag helps sellers to push the price even lower.

Following a strong downtrend, the price behavior consolidates within the two parallel trend lines in the opposite downtrend’s direction. As soon as the supporting trend line is broken by the price line, it is followed by the bear flag pattern. It means that the price action will keep trading lower.

Does it Work on Crypto Market?

Cryptocurrency is commonly misunderstood as a complex financial instrument used only on a black market. This isn’t true; cryptocurrency, in reality, is similar to forex. It’s simply an asset that you exchange on the market. You can invest in cryptocurrency on the market and interpret trends by using various indicators.

This means that most patterns and indicators also work on the cryptocurrency market. It’s worth mentioning that most cryptocurrencies, even Bitcoin, are volatile and hard to predict. But if you wish to try trading crypto, consider using risk management tools.

It’s also a good idea to back up the bear flag pattern with various other useful indicators. For example, apply moving averages, use the volume indicator, etc. Combinations of these indicators work best to forecast a volatile market.

The bearish volume often increases as the flag’s pole keeps forming, right until consolidation occurs. Traders interpret this sign as a strong bearish sentiment and that the consolidation could be only a temporary occurrence.

The bear flag stocks have been used for decades on foreign exchange and commodity markets and now on the crypto market as well.

Bear Flag Pattern and its Meaning in Trading

How to Identify the Bear Flag?

As soon as traders get acquainted with all the components of the bearish flag, they can identify it on the market. Note: the bear flag patterns can be applied on all financial markets, including forex. The pattern consists of three main parts:

This is how the bear flag is forming on a chart:

It might be easier to check a video tutorial to see how the bearish flag is forming.

Bear Flag Trading Strategy

When trading the bearish flag, it is recommended to use the same principles as when trading any other candlestick patterns, like a bull pattern. As soon as a trader spots the flag, they have to pay attention to what is happening on the market. Look at the potential break of the support trend line (below).

Some individuals are too impatient and enter trades when it’s either not the bearish flag or too early during the formation of a bear pattern. Note: it’s always critical to wait for the actual breakout to occur. Moreover, the pattern becomes relevant only when the breakout occurs. That’s when the price gets lower.

One of the best ideas is to apply standard entry options as soon as the breakout of the line occurs. Open the trade when the breakout candle is positioned below the flag.

But it’s also possible to wait a bit more even after the breakout. The price may return to the previous position even after the breakout. This second option offers a greater risk-reward when the entry occurs at a higher price.

You can also use other technical analysis tools to make sure a downtrend occurs, and you enter trades at the right moment.

Final Thoughts

It requires time and patience to learn how to trade by using various technical analysis tools. You may consider using the services of a broker if you want to earn money from trading. But it’s worth trying to educate yourself and become a successful trader. There are plenty of tutorials and educational materials, so it’s worth a shot.

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Carolyn Huntington is an economist, professional trader, and analyst. She made her first big deal in her student years with a profitable investment in Facebook stock. Now the total experience of her trade is 18 years. Over the years of trading, Carolyn has developed its own strategy that allows even those who have never traded on the stock exchange before to earn money. She also creates market forecasts and advises major shareholders, compiles investment portfolios, and teaches how to work with automated advisors.