How to Trade Bear Flag Pattern
Any trader who uses chart patterns must have one way or the other come across the bear flag pattern. A bear flag is a bearish chart pattern and one of the numerous candlestick chart patterns used by traders to identify a trend. In this article, we will focus on extensively discussing what is a bear flag, bear flag market strategies, how to use the chart pattern, and how it works.
We will also analyze the structure, advantages, and disadvantages of the Bear flag pattern.
What is Bear Flag Pattern?
The bearish flag is a chart pattern that indicates the continuation of a downtrend after experiencing a temporary stop. This bear flag indicates that sellers are pushing the price of an asset lower.
After a great bearish trend, the price trend consolidates between the resistance and support trend lines. Once the price breaks below support, the downturn continues forming more high lows. As the pattern continues to draw lower, the prince trend continues a downward movement.
Formation of the Bear Flag Pattern
As earlier stated, a bearish chart pattern is the indication of the continuation of a downtrend. This pattern is formed when there are two recorded lows divided by a brief period of consolidation price reversal.
As the bullish trend starts to decline, the flagpole appears to be on a bearish price trend, indicating that sellers are taking control of the market. Then price bounces from opposite sides of upper and lower trend lines, thus forming the flag.
The previous sell-off stops when there is a profit-taking event, forming a close range, forming little higher highs and higher lows.
This shows that the selling pressure is high, and demand is low. However, traders sometimes enter long positions, waiting for a price reversal and therefore leading to spring swings in the bullish trend.
When the price consolidates, traders get ready to open a position, as soon as the price breaks through the lower trend level or makes new lows, it means the bears are in control of the market, giving a sell-off signal.
When the price breaks through the support level, it gives off a sell signal, leading to a strong downtrend and recording new lows.
A bear flag can be successful when there is a strong downward trend caused by the probable rise of the above resistance.
The Bear flags are said to be highly significant when the new low that gives rise to the pattern is also recorded as an all-time low caused by the possibility of no underlying support.
For traders who are incessant with the bull flags, the bull flag is the opposite of the bear flag. They serve the same purpose, but in opposite directions.
Bear flag formation summary:
- Continuous downtrend (flag pole)
- Specify bullish sloping consolidation (bear flag)
- It might not be a flag pattern If the price reversal goes above 50%. Normally a flag pattern shows a retracement level of 38%.
- Open a position above the flag or on the breakout below the low of the support level.
- Check out for prices that break below the same size as the flagpole.
How to Identify Bear Flag on Forex Charts
Once a trader understands the basics and components of a flag pattern, identifying the bear flag becomes easy. The identification of this pattern applies to all tradable assets like Stocks, Forex, Commodities, etc. This pattern is grouped into 3 different parts:
- Traders have to identify the flagpole, which is not like a previous downtrend. This downward slope can have high momentum, air a low momentum, this slope creates the basis of the trend.
- The bear flag is specified as a brief period of price retracement after prices have completed the initial phase of decline. During this time of retracement, prices slowly move upwards and reverse a part of the initial move. During this period, traders wait for price to break below the direction of the trend.
- After some time the price starts to slope downwards, and traders look out for the final element needed in trading the bear flag pattern. The profit target is set, this is a significant value required during this trade. The profit target level is determined by first estimating the distance in pips of the previous downtrend. The value is deducted from the high resistance level established by the consolidation flag.
What the Bearish Flag Pattern Tells Us About A Trade
Similar to a bull flag, the bearish flag is made up of the flagpole and the flag. The flagpole is formed after the price trend slopes downward, giving rise to lower lows.
When the new low is formed, the price action begins to form new highs as sellers take a break from controlling the market. This consolidation occurs within two parallel lines.
Traders used this consolidation period to try and overturn the velocity of the sellers, who are in control of the market. The bear market takes a break to consolidate the most recent profits before starting another downward trend.
This period of consolidation doesn’t extend too high. Depending on the momentum of the bearish trend, the reversal can be mild or sharp. Generally like earlier stated, the reversal should not exceed the 50% Fibonacci retracement level of the flagpole.
Generally, a price pullback should stop at 38.2% Fibonacci retracement. The momentum of the downtrend depends on the duration of the pullback. If the duration of the pullback is short, it indicates a stronger bearish trend.
These three elements are important when identifying a bearish flag.
The flagpole: The price of the trade is speculated in higher lows and higher highs.
Flag: Price consolidation must occur in a bullish trend between two opposite trend lines.
A breakout: When the price breaks through the supporting trend line, it signals the beginning of the bear flag pattern
How to Trade Bearish Flag Pattern
Trading the bearish flag isn’t different from everyday trading using other candlestick patterns. Once the pattern is spotted, traders will be on the lookout for the break of the present trend.
Most traders are always in a hurry to open a position and end up trading a false breakout before the main breakout occurs. Therefore, it is important to trade only when the breakout has been confirmed.
The possible sell indicators developed by the bear flag are straight to the point.
The best time to enter a trade is when the price breaks below the flag.
The price breakout of the flag indicates that the bearish trend is ready to continue.
Note that the brief consolidation I.e the flag is a period when the price stops trending or reverses in the bearish trend. As earlier stated, the price should not retrace more than 50%.
The fact about trading with chart patterns is that they have different magnitudes. No bear flags have the same pattern or similarities, there is always a notable difference.
When the price moves in the opposite direction, it means the flag is facing upwards, this indicates a bull flag chart pattern, which is contrary to the bear flag.
For instance, A trade shows both standard entry signals after a breakout.
The first entry option is opening a position immediately when the breakout candle shuts down below the flag.
The second entry option is to wait for a rebound when the price trend returns to the previous trend. This entry option provides a decent risk-reward since the entry of the trade is placed at a higher level.
Contrarily, the first option indicates that a trade reversal is not assured, and the present trade opportunity can’t be missed.
When a trader is impatient, they choose the first option. Thus, after the breakout candle closes underneath the lower trendline, a short trade is opened.
The Psychology Behind the Bear Flag Pattern
The bear flag pattern features a strafing sphere where the balance of supply and demand of the market has been tipped badly in one direction of the market. In turn, this produces a very minute upward reversal, which enables the flag formation to take place.
After the previous sell-off, traders who missed out on the opportunity will panic and start selling off their long positions, thus leading to a panic selling situation in the market.
When the price pauses a little forming a price consolidation, traders wait for the price to increase and sell off. But since the supply is greater than the demand this will not occur. This leads to a major decline making people panic and sell.
Now let’s take a look at the best method to take advantage of the bear flag pattern. These steps will effectively teach you how to generate profits with this pattern using only chart patterns. There won’t be any need for technical indicators.
Accurate Bear Flag Chart Pattern Strategy
There are lots of bear flag strategies available in the market sphere. However, we will analyze the one that offers quick profits and is easy to use.
One of the first strategies a trader learns is how to trade using price action. The bearish flag is one of the most popular price action patterns. Any trader who is conversant with the trading sector must have heard about the bear flag pattern.
This pattern is popular because it is a very simple continuation of the pattern, and it forms after a strong downward trend.
Irrespective of the timeframe used, either a short time frame or a long time frame chart. The chart pattern displays the same momentum during all timeframes.
For most traders, the continuation bear flag pattern is a welcomed trend, as it signals the continuation of the decline of price in the market.
This is great news, especially for traders who missed the opportunity of going short in the initial bear trend. Thus allowing them to sell off their remaining long positions.
After familiarizing yourself with the trading psychology of the bear market, let’s extensively talk about the step-by-step guide. This guide will give you an easy approach to defeating market volatility while using this pattern.
The good thing about this pattern is that it enables traders to know how low the price of an asset will decline.
Now this time is to learn how to trade the bearish flag using a very simple and less complex method.
This market strategy will be analyzed in five steps. These steps are a set of rules that will enable any trader to trade the bear flag chart pattern strategy.
Note: a credible bearish flag requires a clean and strong decline. This is a strong indication of a downtrend and that supply and demand are imbalanced.
Note: the sharp move is known as the Flagpole, it is the first component of a bearish flag structure.
Locate an initial bearish trend. For a credible bearish flag, a sharp decline needs to be observed.
However, after spotting the pattern, do not jump right into the market and start trading.
Note: the right context and price need to align before any position can be opened.
So, the first thing is to specify the initial market trend.
Identify the structure of the flag price.
The price trend needs to proceed in a tight range between two opposite lines.
This flag price structure is the second component of the flag pattern. The pattern is very identical to a bearish triangle and most traders make use of the triangle bear pattern.
Generally, all that is required, is the identification of one support and resistance level. This support and resistance area must contain the price trend in a tight range.
This tight range is the primary point for the bear flag pattern success ratio.
After that, the next thing is to pinpoint an entry point for the trading strategy.
This next step is picking a Sell strategy. Sell at the closing candle that forms the flag breakout.
After pinpointing the price trend and the structure of a credible bearish flag pattern, the next thing is to await trend continuation confirmation.
There are two main types of techniques used to open a position using this pattern. Experienced traders will open a position at the top of the bearish flag and generate bigger profits.
While conservative traders will wait for a price confirmation before opening a position.
However, it is advisable to trade the conservative method and wait for the price to break and close beneath the bearish flag before opening a position.
The bear flag chart pattern strategy is looking for trade opportunities after identifying a breakout beneath the flag price formation.
The next thing to note is the point to place a protective stop loss. A stop-loss order is very important for this strategy, as it helps curtail losses if peradventure the market moves sideways, or doesn’t go according to plan.
When analyzing this market strategy it is crucial to ensure the context of the overall market meets up with the displayed signals.
Set a protective stop-loss a little over the Flag. The Rectangle chart pattern enables traders to easily estimate the amount of risk involved, as it gives traders the ability to set a tight stop loss a little above the Flag price formation.
This stop loss is necessary for curtailing losses, and a higher risk-to-reward ratio.
With a tight stop loss, a trader gets to have a relaxed mind, without the fear of losing his or her capital to the volatility of the market. With a good stop loss, a bearish flag has the potential of generating good profits.
The next thing is to pick the best point to set a profit target.
Take profit target
This is identical to the price distance of the flagpole estimated from the top of the bearish Flag down. That is the measurement of the Flagpole starting from the top of the flag downwards.
Traders are always excited about this type of price consensus, and always take advantage of the opportunity.
When is the Best Time to Trade the Bear Flag Pattern?
As stated earlier, the best time to trade the bear flag is after the price breaks through the support level.
The general method of trading the support and resistance breakouts levels is by opening a short trade immediately after the price breaks below support. A long trade is opened immediately when the price breaks above the resistance level.
However, this trading strategy has its drawbacks.
Let me explain:
Monitoring price after a breakout to catch a price action, it’s a bad idea for various reasons.
Firstly, you are at the risk of selling the low of the day, this is because you’re going short after the price has moved lower.
Secondly, the risk-to-reward ratio of this type of trade is always against the trader.
Therefore, these two strong reasons are enough not to trade the breakouts.
If you still want to take advantage of the market volatility resulting from the breakout, it is better to wait for the bear flag pattern to form before opening a position.
The bear flag pattern provides traders with a. A clean trade strategy gives rise to a good risk-reward ratio.
However, the disadvantage of this is that if the bear flag does not firm on the price chart, you’ll miss out on the breakouts.
To be on the safer side, you will have to extensively learn how the professional traders trade the breaks outs and are on the lookout.
The next subtopic explains the psychology behind the pattern, that is the actions that take place behind the scenes.
Pros and Cons of Trading the Bear Flag
The bear flag can be utilized in all financial markets. These markets include cryptocurrency, Forex, Stocks, etc. When trading Bitcoin and Altcoin the pattern can be determined using any of the time frames such as the H15, H30, H4, H1, and D1. This chart pattern is used by both day traders and seeing traders.
STRONG ENTRY AND STOP-LOSS RULES:
This is one of the top advantages of the bear flag pattern. It helps traders know the beat point to set their stop loss levels when opening a short position. It also helps traders to pinpoint the bat profit target.
The pattern enables traders to have a good risk-reward ratio. While there is no guarantee of the outcome of the market, a trader will still be able to generate little profits from long-term market strategies.
Just like using any chart pattern, or technical indicator, there are some drawbacks associated with each tool or pattern used.
This pattern seems clear and very simple, however, it is not as simple as it looks. This could be difficult for beginners to navigate. However, with the use of demo accounts, a trader can effectively learn the ins and outs of the chart pattern before moving further.
Another drawback is that, in some cases, the retracement can last longer than expected. When the flag moves higher than 50% of the pole, it is advisable to ignore the pattern, as the pattern will not be reliable. However, in some cases, the price trend of this pattern does not follow the rules. But to be on the safer side it is better to if more once it hits above 50% of the pole. However, some traders can decide to incorporate this pattern with Denise or technical indicators to provide more accurate signals.
Once you have the right trading conditions, pinpointing the bear flag pattern should be easy. However, note that there is no guarantee that the bear flag chart pattern will work, so traders should be prepared for the unexpected.