Bull Flag: Definition and Trading Strategies
The bull flag is one of the most popular patterns in the financial market. Traders use it to determine when and where to enter and exit the market. But what should beginning traders know about this pattern? Keep reading the article that we have prepared to learn more.
Understanding a Bull Flag Pattern
Sometimes, the asset’s price on a market may behave unexpectedly, for instance, sharply upwards. This may occur because of some economic or geopolitical events taking place. Another reason is the entry of bulls.
It’s common to observe the price rising infinitely in such cases. The prices increase and hit breaks at some point, as bulls start profiting and bear come in. That’s when traders can observe a pattern known as a bull flag.
So, what is a bull flag? It’s a pattern which starts as a sharp increase in an asset’s price. Then a channel with a number of parallel resistance and support levels appears. It is usually short.
The Three Main Features of a Bull Flag
The bull pattern has three main components. The first component is formed right when the asset’s price jumps. This is a flag pole of the indicator. The second component is the consolidation phase, which indicates that bulls and bears enter the market. This often happens if the volume on the market is low.
It’s critical to ensure that the retracement won’t go deeper than 50%. If this retracement happens, it could indicate that a new trend is about to come up. Consider using a Fibonacci retracement indicator to calculate the retracement level.
How to Trade Bull Flag?
It is relatively simple to trade bull flags, especially upon gaining experience. The most difficult part is to spot the bull pattern in real-time. The good news is that certain scanners are streaming every day to spot the flag, so it should be easier.
There are even free scanners that enable one to find a flag pattern: Chartmill or Finviz. Here is how to trade a bull flag pattern:
- The stock is going up on high relative volume. The best option is when it goes from a news catalyst.
- Asset’s price consolidates at or near highs that have defined pullback patterns.
- Start buying stock if prices break out the consolidation pattern, but only if it’s on high volume.
- Place stop-loss order below the bottom of the consolidation pattern. Profit targets should have around 2:1 risk/reward. If a person is risking 25 cents, then the first PT should be 50 cents from the entry price.
Start looking for volume if spotting the bull flag pattern. The volume confirms major moves and indicates the potential successful breakout. The second thing to start tracking is a defined descending trend line. It should be somewhere near the point of breakout.
This trend line should be the top part of the flag. In the bullish pattern above, traders typically see a very recognizable trend line. This line is also defined, and when it breaks out, the price jumps rather quickly.
The bull flag stocks have a statistical edge, but only if an individual trade them correctly. But if there is a failure, a trader must have a spot to exit trades. More precisely, a trader should understand how the failure looks on the chart. Exactly. At what point they should immediately get out to avoid losses.
You have a few options to manage the failed trade. Consider the most common way of placing a stop — below a consolidation area. Another option is to utilize the 20-day moving average as a stop-loss tool. If the prices start closing below the moving average, then close out the position.
Bull vs. Bear Patterns
A bear flag looks similar to a bull flag, but with some exceptions. The bearish flag pattern goes down, indicating that the price is also falling. The bearish flag has a sharp down move on a high relative volume and is followed by a small pullback before the trend continuation.
When trading any flag pattern, it is critical to check the volume. If the volume comes in during the breakout, your best bet is to jump on board. It means a trend confirmation — other traders were waiting for this pattern and are about to increase the likelihood of success. It’s possible to get profit or avoid losses when paying attention to the volume.
Pros and Cons of Using a Bull Flag Pattern when Trading
All technical analysis indicators and tools have advantages and disadvantages. Mainly, these indicators have disadvantages when people rely only on one indicator when making a decision. But there are other things to consider. Let’s start with the pros of the indicator.
The very first reason why day traders prefer a bull flag pattern is simply because it’s one of the most popular patterns on the market. It’s extremely difficult not to notice it on the market — it forms quite often, every day.
Another reason is its accuracy. Yes, even though you can’t rely on one pattern, it’s still rather accurate. And the third reason to use the pattern is it is relatively easy to identify the pattern and use it in the financial market, like Forex. And last but not least, the flag can be spotted on any chart: from 5-minute to a weekly chart. That’s why so many traders prefer bull flag patterns.
Even though the bullish flag is so effective, it has quite a few drawbacks. One such drawback is its slow formation. It takes some time to form a bull flag, and it may even take entire months! And another disadvantage is its false signals. If traders don’t verify these patterns results and invest, they may experience losses.Yes, I want access to free training