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.
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:
- Flag pole. Individuals have to find the flag pole. They identify it as the initial decline. The decline could look steep or slowly sloping. It’s the basis of the trend.
- The bear flag. The bearish flag is a period of consolidation after the formation of the price’s initial decline. When this period occurs, prices could slowly channel upward and fall back a bit towards the initial move. This time traders are waiting for the price to break towards the direction of lower lows and then in the direction of a trend.
- The last component of the bearing flag occurs when the price starts moving lower again. Individuals can now see the bearish flag. The aim is to target a potential currency’s price decline. The price level is identified by measuring the distance in pips of the initial price decline. Subtract the value from the peak resistance line that starts forming from consolidating flag.
This is how the bear flag is forming on a chart:
- Preceding a downtrend (flag pole).
- The consolidation is moving upward.
- If the retracement shows more than 50%, it could be another pattern, not a flag pattern. The typical retracement is less than 38%.
- Consider entering trades when you see the line at the top of the flag or on a breakout below the low of the lower channel.
- Keep looking for prices to break lower. The line should be of a similar length to the size of the flag pole.
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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