Bull Flag Chart Pattern: How to Use in Trading
The second step in spotting the bull flag pattern is monitoring the shape of the correction. Bull flags form after a price spike that peaks out and slowly forms a short-term reversion downtrend. The starting points for the trend lines should connect the highest highs and the highest lows to represent the flag portion. While the lines are Bull Flag Pattern sloping down, they should remain relatively parallel to each other. Eventually the price should spike up through the upper trend line triggering shorts to cover and buyers to come off the fence. When the price exceeds the highest high, the bull flag is formed as buyers rush in making new highs and the next leg of the up trend resumes.
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Examples of Bullish Flags
The strong directional move up is known as the ‘flagpole’, while the slow counter trend move lower is what is referred to as the ‘flag’. On the other hand, a bull flag may be viewed as a trade management device for closing out existing short positions. Chart patterns Understand how to read the charts like a pro trader. Permissible Deviation- The maximum allowable deviation of the points in the flag from the parallel channel lines. It is calculated as a percentage of the channel height. Invert Pattern- Invert the pattern to search for a bearish flag. Add on a breakout to the high of the day if volume expands.
- The trendline marking the uptrend’s most recent price movement should have a steep angle.
- Set a stop-loss point at the opposite side of the flag pattern.
- Although flags are very simple classical chart patterns, they provide an extremely accurate prediction of the next price movement.
- The high volume confirms the breakout and suggests a greater validity and sustainability to the move higher.
- The breakout is where you will take your trade when using the flag pattern.
- In this article we look at how to trade these opportunities.
Step 1: Identify the Pattern
One advantage is that it might give an accurate prediction, and a disadvantage is it might give an inaccurate prediction. More specific disadvantage to the bull flag is that even if your trade does eventually work out in your favor, it might take a long time to come to fruition. Volume may increase first and then decrease as the formation reaches the endpoint.
What Are The Components of a Bull Flag Pattern?
A bull flag pattern consists of a flagpole denoting a considerable, almost vertical rise in price. After that, as the market consolidates in retracement before another price hike, the phenomenon forms the flag extending from the flagpole. Moreover, a bull flag pattern shows candlestick projections within the consolidation period.
Second, wait for the price to form a bull flag pattern. Now, I’m not expecting us to see the same thing all the time because the bull flag pattern is a discretionary trading concept.
Strategy #1: Bull flag trend continuation strategy
It usually happens when the price declines sharply and then form some consolidation. In the chart below, we see that the USD/JPY formed a bullish flag. In the first instance, the price dropped to the 23.6% Fibonacci retracement level. Had it dropped below the 50% retracement, the pattern would have been invalidated. The bull flag isn’t a difficult pattern that can occur at any time and for any asset. It provides a signal of the uptrend’s continuation.
On the contrary, technical analysis disregards the EMH and is only interested in the price and volume behavior of the market as a basis for price prediction. A technical analysis pattern called the bull flag is a recognized price pattern and is thought to indicate that a price increase is about to occur. Usually, there is a surge in volume as the stock builds the flag pole.
Pros and Cons of a Bull Flag Pattern
Once the pole is found, identify the range of consolidation or wavering in the price of the stock . Prices will likely fluctuate during this stage before they begin trending upwards, assuming the bull flag does what is expected. This is because the consolidation creates a resistance line at the higher end, while the lower end is the support line. When the stock price rises above the resistance level and continues in an upward trend, the pattern has been established.
The breakout suggests the trend which preceded its formation is now being continued. A breakout strategy aims to capitalize on a sudden, definitive move in price action.