The flag is one of the most commonly mentioned patterns in technical analysis and can provide clues to price trends and potential next moves.
In technical analysis, a flag pattern indicates short-term price action within a parallelogram that is opposite to the previous long-term trend. Traditional analysts view flags as potential trend continuation indicators.
There are two types of flags: bull flags and bear flags. While the results vary, each flag shares five key characteristics, listed below:
Strong leading trend (flagpole or pole)
merge channel (flag itself)
volume pattern
breakthrough
Confirmation that price is moving in the direction of its previous trend.
In this article, we discuss bull and bear flag patterns and how to trade them.
What is a bull flag pattern?
A bull flag is a technical pattern that occurs when prices consolidate lower within a downward sloping channel following a strong uptrend. The channel consists of two parallel uptrend lines. Note that if the trend lines are converging, the pattern may be a wedge or pennant.
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The sense of urgency, or "FOMO" (fear of missing out) from investors new and old, typically returns when price breaks above the bull flag's upper trendline, increasing trading volume.
As a result, analysts view strong volume as a sign of a successful bull flag breakout.
On the other hand, low volume when price breaks above the bullish flag's upper trendline increases the likelihood of a false breakout. In other words, there is a risk that the price will fall below the trend line, thereby invalidating the bullish continuation setup.
Trading Bull Flag Setup
Traders can enter a long position at the bottom of a bull flag pattern in the hope that the next rise in price to the pattern's upper trendline will result in a breakout. More risk-averse traders can wait for breakout confirmation before opening a long position.â
As for upside targets, a bull flag breakout will typically send price up by as much as the size of the flagpole measured from the base of the flag.
The following Bitcoin price pattern between December 2020 and February 2021 shows a successful bull flag breakout setup.
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Note that traders should maintain risk by placing their stop loss below the entry level. This will allow them to cut their losses if the bull flag fails.
What is a bear flag pattern?
The bear flag pattern is the opposite of the bull flag pattern, showing an initial downward trend followed by upward consolidation within a parallel channel. A downtrend is called a flagpole, and an upward consolidation channel itself is a bear flag.
Meanwhile, periods of bear flag formation tend to coincide with declining trading volumes.
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Trading Bear Flag Pattern
Here are instructions on how to trade bear flag patterns on cryptocurrency charts.
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In the Bitcoin chart above, price formed a flagpole, followed by an upward retracement within an ascending parallel channel. Eventually, BTC price broke out of the channel range downwards, falling to flagpole height.â
Traders can choose to open a short position on a pullback from the flag's upper trendline, or wait until price breaks below the lower trendline and volume increases.
In either case, short targets are usually measured by subtracting the peak of the flag from the flagpole dimensions.
Related: What is the Doji Candlestick Pattern and How to Trade with It?
Meanwhile, a break below the flag's lower trendline accompanied by low volume signals a false breakout, which means price may reclaim the lower trendline as support for a potential rebound within the parallel channel.
In order to limit losses in the event of a false breakout, it is important to set your stop loss above the entry level.â
This article does not contain investment opinions or recommendations. Every investment and trading involves risk, and readers should conduct their own research when making decisions.
