If you can identify key levels on a chart where shorts could be underwater, then see a bull flag form, it could be indicative of a coming squeeze. We discuss this strategy in detail in our post on liquidity traps. Bull flag trading patterns are one of many patterns that traders study in the markets. Trading patterns are a way to simplify the markets and condense information into repeatable, visual formations.

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Flag patterns – Bullish and Bearish

The initial rally comes to an end through some profit-taking and price forms a tight range making slightly lower lows and lower highs. From beginners to experts, all traders need to know a wide range of technical terms. Deepen your knowledge of technical analysis indicators and hone your skills as a trader. Now that we have a good understanding of where to take profits, there is still one more thing left that we need to take care of, which brings to the next step of the best Flag pattern strategy.

Let’s take what you’ve learned and develop a Bull Flag trading strategy. You can use a tool like the 50-period moving average to trail your stop loss and only exit the trade if the market closes beyond it. If you wait for a close above the highs, you reduce the chance of a false breakout. But, if the breakout is strong, you end up entering at a much higher price. There are times a Bull Flag Pattern can form when the market is in range, at Resistance.

We can see that we have a good profit target of approximately 262 pips and if we measure the same amount from the breakout point and project it to the upside we get our profit target. In this case, we want to enter when we break above the upper flag “border” or https://trading-market.org/ above the top of the flag pole. Investing and Trading involves significant financial risk and is not suitable for everyone. No communication from Rick Saddler, Doug Campbell, John Carignan, or this website should be considered as financial or trading advice.

Risks Associated with Bull Flag Pattern

A bull flag pattern is a technical analysis term that resembles a flag. It is considered a bullish flag pattern because it generally forms during an uptrend. The “flag” part of the pattern forms when the price consolidates sideways after a sharp rally.

Traders tend first to identify a bullish trend that has started to consolidate. During the consolidation phase, the price would form a rectangular shape with an upper boundary resistance line and a parallel lower boundary support line. Bullish and bearish flags are among the most popular continuation patterns, typically spotted when the trend is likely to continue to prevail. The length of the pattern can be different depending on the time period. Successful traders use technical analysis tools to analyze assets’ past performance and try to predict the duration of the pattern. Let’s evaluate how much the initial rally of the price lasted before the downward consolidation.

Trading bull flags with volume confirmations

If a bull flag pattern is correctly spotted, it will indicate the continuation of a bull trend that already exists, and the price will increase after the pattern is finished. While no one knows whether the market rally will continue or reverse, traders should follow price action and let the probabilities take care of the rest. While all chart patterns are susceptible to false signals and surprise moves, bullish flags are among the most reliable and effective patterns. Cantel Medical Corp.’s price chart is an example that appears to have broken out from a bull flag pattern.

These patterns are helpful for traders who wish to take advantage of short-term and long-term market trends. The trading patterns work in all financial markets, not just the crypto market. A bull flag is comparable to a bear flag, with the exception that the trend is upwards. An intense rally followed by a flag-shaped trend halt helps traders identify bullish flag formations. Even though the bull flag pattern tells about a continuation pattern, the trader’s risk-return profile determines the success of any crypto trading strategy.

This would be a new high and an indicator that the breakout is in process. You can use a buy stop order to make sure that you get it at the price you want. All three bull flag patterns are perceived as possible signs that a stock that may be bull flag formation trying to break out of a consolidation and continue an upward trend in price. The bull flag pattern itself is essentially just a continuation pattern; it’s just sort of representing a pause or a pullback in the market after a stronger move.

How to set your stop loss when trading the Bull Flag Pattern

Bear flags are usually observed in a downtrend when the asset’s price is anticipated to face further downside pressure. The length of the exit line from a downward consolidation phase is proportionate to the length of the flagpole. I should note that this pattern is visible most clearly on larger timeframes, since the pattern may behave incorrectly on smaller timeframes.

After you buy the breakout, you then set your stop below the breakout candle. In this example, your target is set for the «resistance» area on the bigger picture chart shown above. Notice the difference between the bull flag example above and this pennant example. Both look bullish, but the structure of the pattern is slightly different. You should notice that the uptrend should be rather sharp and accompanied by strong volume.

Let’s look at some strategies implemented to trading the bull flag. JSI uses funds from your Treasury Account to purchase T-bills in increments of $100 “par value” (the T-bill’s value at maturity). The value of T-bills fluctuate and investors may receive more or less than their original investments if sold prior to maturity. T-bills are subject to price change and availability — yield is subject to change. Investments in T-bills involve a variety of risks, including credit risk, interest rate risk, and liquidity risk.

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Instead of a rectangular outline of the flag, the pennant consolidates the stock in what looks like a triangle with the top line descending and the bottom line ascending. This means that the support and resistance levels will not be trading at equal distance levels but instead converge in a smaller trading window before having a breakout. Note that the flag might be horizontal, but can often lean downward, demonstrating a countertrend to the prior spike upward in price. At the end of the countertrend (flag), a continuation of the upward trend is indicated by a rise in price above the upper boundary of the flag. In general, the bull flag pattern is considered as a reliable pattern in technical analysis.

The question is when to buy if you see a bull flag pattern emerge. You could buy in the consolidation phase where the stock is hitting resistance and support levels but this is a risk. If the pattern doesn’t end up being a bull flag, the stock could go down with you holding it in a down pattern. Instead, some people look to buy at a price just above the resistance level.

• The initial rally comes to an end through some profit-taking and price forms a tight range making slightly lower lows and lower highs.
• Let’s take what you’ve learned and develop a Bull Flag trading strategy.
• You can use a buy stop order to make sure that you get it at the price you want.

The high volume into the move lower (flagpole) and low volume into the move higher, are suggestions that the overall momentum for the market being traded is negative. This furthers the assumption that the preceding downtrend is likely to continue. In terms of managing risk, a price move above the resistance of the flag formation may be used as the stop-loss or failure level. In terms of managing risk, a price move below the support of the flag formation may be used as the stop-loss or failure level.

• The flag can be a horizontal rectangle but is also often angled down away from the prevailing trend.
• This sounds very simple, but it takes a trained eye to really see the quality of the bull flag.
• A bull flag and a pennant can both resolve in the upward direction.
• Identifying trends early while trading in digital assets allows traders to plan and execute their trades effectively.

The pattern formed by inverting the bull flag stock pattern is called the bear flag stock pattern. We hope this helps you in your trading journey and education in the markets. If you would like to learn more about chart patterns and trading strategies, please check out our free educational resources here at TradingSim. A bull flag fails or is invalidated once it breaks the low of the breakout candle. If we are astute traders who understand support and resistance, we could have gauged the quality of the bull flag as a small consolidation along the way to the resistance area above. This would give us confidence, not only that the move might not be finished, but also as to where our target could be set.

Our entry is located either at the close of the breakout hourly candle, or we wait for a retest, which can be tricky as the price action may never return to retest the broken resistance. In this example, we enter the market as soon as the breakout candles close above the flag’s resistance. Bull and bear flags are continuation patterns that grant traders entry into an ongoing trend. As much as they are reliable across different market timeframes and financial markets, it is not a good idea to start trading them without practicing how they work.

It’s not a coincidence that the bullish flag pattern resembles a national flag after all; the name was inspired by the similarities with the national flag. Even though flags and pennants are common formations, identification guidelines should not be taken lightly. It is important that flags and pennants are preceded by a sharp advance or decline. Without a sharp move, the reliability of the formation becomes questionable and trading could carry added risk. Look for volume confirmation on the initial move, consolidation and resumption to augment the robustness of pattern identification.

Another example of a bullish flag pattern is the one that formed on the Ethereum chart in mid-2020. After a sharp price increase, Ethereum consolidated in a rectangular pattern for several weeks before breaking out and continuing its upward trend. There are several examples of bullish flag patterns in the cryptocurrency market.