Bull Flag Pattern Explained: How to Identify and Trade this Bullish Signal

bull flag formation

It’s constituted after the price action trades in a continuous uptrend, making the higher highs and higher lows. A bull flag resembles the letter F, just like the double top pattern looks like an “M” letter and a double bottom pattern – a W letter. Following bull flag formation the creation of a short-term peak, the price action starts a correction to the downside. Like every other aspect of technical analysis and trading, it is better to enter and exit trades using a combination of tools, indicators, and candlestick patterns.

bull flag formation

Basically, despite a strong vertical rally, the stock refuses to drop appreciably, as bulls snap up any shares they can get. The breakout from a flag often results in a powerful move higher, measuring the length of the prior flag pole. It is important to note that these patterns work the same in reverse and are known as bear flags and pennants. Bull flags typically begin to surface in conjunction with a new market rally. With the descriptions we have made, identifying the candlestick patterns is easy.

Flag patterns have five main characteristics:

This will limit the potential losses if the price moves against the trade. To open a position, you need the breakout to be confirmed and the price to consolidate higher. After opening a position, set a stop loss below the formed flag pattern. In this article, we will talk in detail about the features of the bull flag pattern and take a closer look at the advantages and disadvantages of this pattern. The flag, which represents a consolidation and slow pullback from the uptrend, should ideally have low or declining volume into its formation.

Is a bull flag bullish or bearish?

A bull flag pattern is a chart pattern that occurs when a stock is in a strong uptrend. It is called a flag pattern because when you see it on a chart it looks like a flag on a pole and since we are in an uptrend it is considered a bullish flag.

Now that we’re in a trade we need to find our target, which brings us to the next step of the best Flag pattern strategy. We have got a really solid looking setup here that follows exactly the rules highlighted in the Bullish Flag Pattern Explained. So, now we can safely enter at the immediate breakout above the flag. Next, we need to figure out where we need to get into the trade, which brings us to the next step of the best Flag pattern strategy. Also, with this strategy, you don’t have to track the price dynamics.

It is a bullish continuation pattern, which means that it signals a resumption of the upward trend after a period of consolidation. A bull flag pattern is a chart pattern that occurs when a stock is in a sharp strong uptrend. It is called a flag pattern because when you see it on a chart it looks like a flag on a pole and since we are in an uptrend it is considered a bullish flag. Traders of bull and bear flag patterns might hope to see the breakout accompanied by a high-volume bar. A high-volume bar to accompany the breakout, suggests a strong force in the move which shifts the price out of consolidation and into a renewed trend.

So… when the market finally breaks out, traders who miss the move can’t wait to enter on the first sign of a pullback. Well, it’s a term I coined when the market breaks out of a range and then does a pullback for the first time. Join thousands of traders who choose a mobile-first broker for trading the markets.

Bullish flags

As the pennant narrows into its apex, it can be difficult to determine which direction it will resolve. A bull flag doesn’t typically form an apex, nor is it completely symmetrical. A bull flag will most often have a downward trajectory instead of a horizontal and level consolidation. For example, the best bull flags occur at the start of a new uptrend. So, the earlier you are in a bull run or momentum swing, the better your bull flag should perform. However, once volume recedes into the pullback, the bull flag will overcome the selling pressure and break this counter-trend consolidation.

bull flag formation

Ultimately they are one of many indicators, which may, in the majority, be pointing the other way. Always use look at other indicators (moving averages, trendlines, price, price patterns, volume) to assist in the final trading decision. Lastly, the current trend of a share should always be respected – preempting a change can prove costly. Volume patterns may often be used in conjunction with flag patterns, with the aim of further validating these formations and their assumed outcomes. A flag pattern is highlighted from a strong directional move, followed by a slow counter trend move.

For example, in an uptrend, where the price is expected to move upwards, a price break downwards could indicate that the trend is about to change. A bullish pennant formation also follows a steep rise in the underlying asset price but may have converging trendlines when consolidating. The narrow trading range may become smaller and shaped like a triangle.

The Best Flag Pattern Strategy

There are many options for protecting this type of trade with a stop loss. Longer-term traders often set their stops below the entire flag, and other traders employ tighter stops such as a two-bar stop. He started trading forex five years ago, and not long after that, he picked up interest in the crypto and blockchain systems. He has been a writer since 2019, and his experience in the Fintech industry has inspired most of his articles.

If you see active growth, then a downward consolidation in the form of a parallelogram or a rectangle, and then a strong rebound, you can say with certainty that this is a bull flag. Confirm the pattern by observing the downward trend resuming after the flag. Bear flag patterns as well as bullish flags should be used with other analysis methods for accurate trading decisions. Once you understand how the bull and bear flags work, it will be easy to identify them. In a bullish flag pattern, you will need to identify the initial price increase, referred to as the flagpole. Following the initial price increase is the period of consolidation, during which prices may move slightly downward or sideways.

When trading bull and bear flags, it may be better to set your stop loss inside or below the price consolidation zone since you don’t expect the price to reverse back into the zone. One way traders try to get into the trend is by waiting for the consolidation to break. In a bullish market, you expect the breakout to be upward to continue the upward movement. A bear flag candlestick pattern shows a downward price movement followed by a short period of price consolidation and then the continuation of the bearish move.

Bull flags usually resolve one way or the other in less than three weeks. The target for a bull flag is derived by measuring the length of the flag pole and projecting it from the breakout point. Following the breakout, traders begin to look for possible entry points into the trend. There are also different ways this is done; one of the common strategies is to wait till the close of the candlestick that breaks the consolidation. A breakout in the opposite direction for each means there has been an alteration of the pattern, and the trend may not continue in the expected direction.

The price action for both bull and bear flags usually mirrors the pole’s distance after a breakout or sharp reversal. In the bull flag patterns, for instance, the flag pole is formed first. Technical analysis chat patterns have many such nuances, but it’s really not as complicated as it seems at first glance.

  • For all you know, the bull flag pattern is formed in an existing downtrend.
  • These patterns are helpful for traders who wish to take advantage of short-term and long-term market trends.
  • I have just learnt from this lecture that the bull flag pattern can also used to trade trend reversal as well as rangt breakouts.
  • We also have a great tutorial on the most reliable bullish patterns.

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  • This is a great lesson on managing risk and respecting your stops.
  • For a more detailed tutorial on bear flags, be sure to check out our tutorial here.
  • But, if it’s a real breakout, it’s the best possible price you can get.
  • Harness the market intelligence you need to build your trading strategies.

Following this step, it will also make it visually a little bit easier to plan your next move. After reaching an all-time high in January, the price of Bitcoin consolidated in a narrow range for several weeks, forming a rectangular shape on the chart. Once the consolidation period was over, the price broke out of the flag pattern, surging to new all-time highs. Imagen that you are standing at ground level and looking at a rectangular flag on a pole that rises to the sky. This visual is what you see on a stock chart when price rises (and breaks out of a resistance level). This resistance level then becomes a support level (ground level) and moves higher in an up trending manner.

A lacklustre session in Wall Street overnight was met with some … – ig.com

A lacklustre session in Wall Street overnight was met with some ….

Posted: Tue, 25 Apr 2023 07:00:00 GMT [source]

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’. An advantage of the bull flag is that it suggests particular profit targets and allows for the setting of a tight stop loss, as explained below. This is a great lesson on managing risk https://trading-market.org/ and respecting your stops. Never assume that any pattern in the market will work 100% of the time. Always set your stop and move on if the trade doesn’t go in your favor. As we mentioned above, you want a bull flag to put in a series of lower highs so that you can buy the breakout of the most recent candle’s lower high.

How reliable is a bull flag pattern?

Among the various technical chart patterns in their toolboxes lies the bull flag chart pattern, which is also one of the most common. This pattern is reliable, consistent, and common. It is found anywhere from the daily chart to the 5-minute chart, and as such, it is a pattern that all traders should be aware of.

However, once the stock has had a chance to pull back and consolidate, the bull flag should produce a breakout, allowing the stock to resume its prior momentum. In other words, there are more traders willing to buy the flag than sell it. A bull flag is a continuation chart pattern that signals the market is likely to move higher. The breakout forms when the upper resistance trend line breaks again as prices surge back towards the high of the formation and explode through to trigger another breakout and uptrend move. CF International Inc.’s price chart is a great example of a really tight flag. Often, the tighter flags perform best, and they also offer easier stop-loss levels.

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. Bull flags can also occur on higher time frames like daily charts. The criteria always remain the same, whether you are trading a 1-minute chart or a daily chart. The only difference is the patience it takes to allow the pattern to develop. First, let’s examine the bigger picture trade idea in the simulator.

What happens when a bull flag forms?

A bullish flag consists of the flagpole and a flag. As such, it resembles a flag on a pole. It's constituted after the price action trades in a continuous uptrend, making the higher highs and higher lows.

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