How to trade bull and bear flag patterns?

In technical analysis, a flag pattern suggests short-term cost motions inside a parallelogram coounter to the previous long-lasting pattern. Traditional experts see flags as possible pattern extension signs.

There are 2 kinds of flag patterns: bull flag and bear flag. While their results are various, each flag shows 5 crucial qualities, as noted below:

  1. The strong preceding pattern (flagpole or pole)
  2. The combination channel (the flag itself)
  3. The trading volume pattern
  4. A breakout
  5. A verification of the cost relocating the instructions of its previous pattern.

In this post, we talk about bull and bear flag patterns and how to trade them.

What is a bull flag pattern?

A bull flag is a technical pattern that appears when the cost combines lower inside a downward-sloping channel after a strong uptrend. The stated channel makes up 2 parallel, increasing trendlines. Kindly note that the pattern might be a wedge or a pennant if the trendlines assemble.

The volume usually dries up throughout combination, suggesting that traders connected with the preceding pattern have less seriousness to purchase or offer throughout the combination duration.

Bull flag illustration

The seriousness to dive in by brand-new and old financiers, or “FOMO” (worry of losing out), usually returns when the cost breaks above the bull flag’s upper trendline, therefore enhancing trading volumes.

As an outcome, experts see strong volumes as an indication of an effective bull flag breakout.

On the other hand, dull volumes when the cost breaks above the bull flag’s upper trendline increase the possibility of a fakeout. In other words, the cost dangers dropping listed below the upper trendline, therefore revoking the bullish extension setup.

Trading a bull flag setup

Traders can go into a long position at the bottom of a bull flag in anticipations that the cost’s next run-up towards the pattern’s upper trendline will lead to a breakout. The more risk-averse traders can await a breakout verification prior to opening a long position. 

As for the upside target, a bull flag breakout usually triggers the cost to increase by as much as the flagpole’s size when determined from the flag’s bottom.

The following Bitcoin (BTC) cost pattern in between December 2020 and February 2021 reveals an effective bull flag breakout setup.

BTC/USD day-to-day cost chart. Source: TradingView

As a note of care, traders must preserve their dangers by positioning a stop loss simply listed below their entry levels. That will allow them to minimize their losses if the bull flag gets revoked.

What is a bear flag pattern

A bear flag pattern is the reverse of a bull flag pattern, displaying a preliminary drawback relocation followed by an upward combination inside a parallel channel. The drawback relocation is called the flagpole, and the upward combination channel is the bear flag itself.

Meanwhile, the duration of bear flag development tends to accompany decreasing trading volumes.

Bear flag illustration

Trading a bear flag pattern

The following is an illustration of how to trade bear flag pattern on crypto charts.

BTC/USD day-to-day cost chart including a bear flag breakdown. Source: TradingView

In the Bitcoin chart above, the cost has actually formed a flagpole followed by an upward retracement inside an increasing parallel channel. Eventually, BTC cost breaks out of the channel variety to the drawback and stops by as much as the flagpole’s height. 

Traders can pick to open a brief position on a pullback from the flag’s upper trendline or wait up until the cost breaks listed below the lower trendline with increasing volumes.

In either case, the brief target is, as a guideline, determined by deducting the flag’s peak from the flagpole size.

Related: What is a Doji candle light pattern and how to trade with it?

Meanwhile, a breakdown listed below the flag’s lower trendline accompanying dull volumes recommends a fakeout, implying the cost might recover the lower trendline as assistance for a prospective rebound inside the parallel channel.

To limitation losses in a fakeout situation, it is very important to position a stop loss simply above the entry levels. 

This post does not include financial investment guidance or suggestions. Every financial investment and trading relocation includes threat, and readers must perform their own research study when deciding.