How to Trade Bull Flag Pattern
The trading sector is filled with lots of candlesticks and chart patterns. These chart patterns are important elements of every trader’s strategy. Chart patterns help traders know the trend of the market, and also help signal a price reversal or continuation. Chart patterns are a type of technical analysis carried out in a trade. There are several patterns used by traders but in this text, we will focus on the bull flag patterns. We will explain what the bull flag pattern is and how to trade and generate profits using the bull flag pattern.
The bullish flag pattern is a type of chart pattern that indicates the continuation of a trend. It indicates the continuation of a bullish trend. Hence, the name bullish (representing the upward trend) flag pattern.
The price trend retraces within the two separate trend lines, in the other direction of the bullish trend, before it breaks out and continues to move upward. This is the opposite of the bear flag that occurs at the center of a middle trend.
What is Bull Flag Pattern?
This chart pattern is discovered in trades with a high uptrend momentum. They are referred to as bull flags because the pattern looks like a flag suspended on a pole. The pole is formed due to an upward increase in the price of the asset, and the flag is formed when there is a brief period of price consolidation.
The psychology behind the pattern is more significant than the flag. The increased bullish momentum leads to a more high price move. A break-out only indicates that the price will continue to move higher.
Note: This chart pattern does the same in the opposite trend, known as the bear flag.
The Flag patterns are made up of five main characteristics:
- The Initial Trend
- The consolidation channel
- The volume pattern
- Price breakout
- Trend continuation confirmation.
What does a Bull Flag look like?
The chart pattern is made up of a pole and a flag. It has an intense rise (the pole) accompanied by a price consolidation (the flag).
See the image below:
Types of Bullish Flags
There are different types of bull flag patterns, let’s take a look at some of them.
Bullish Flag Emergence
A bullish flag emergence is a bull flag that is on the verge of breaking out. As the flag pole is been formed, It always has a high momentum as the price and the tight price retracement that ensues afterward.
Rectangular Bull Flag
This rectangular pattern shows an increase in volume as the trade builds up the flagpole. As soon as consolidation takes place, volume drastically reduces. An increase in volume is noticed when the price breaks out from the bullish trend. However, this volume increase is not immediate.
Bull Flag Breakout
This is the chart pattern that indicates a chart patterns breakout. This price breakout is normally the support level. This level is the place where the price will not go below and traders set it as their stop loss. Long-term traders set their stop loss below the flag, while some traders set their stop loss a little tighter.
Tight Bull Flag
This is one of the best-performing bull flag patterns. They provide the best and most simple stop-loss points. Bull flags normally rebound after a week or two. In longer trends, the pattern forms a rectangle or triangle.
Formation of the Bull Flag
Simply put, this chart pattern is a bullish chart pattern created by two bullish trends separated by a brief price consolidation.
The flagpole forms when there is a vertical price increase, as sellers begin to lose control over the market, and buyers begin to gain control of the market. A pullback occurs forming two parallel trendlines on the opposite sides forming the flag.
The previous bullish trend is brought to an end when there is some profit-taking and the price establishes a tight range. This leads to the formation of lower lows and lower highs.
Ultimately, price increases form a pullback where the highs and lows are opposite each other, establishing a skewed rectangle.
During the price consolidation, this is the time for traders to prepare and be ready to open a trade. As soon as the price breaks a new high, this signals a continuous bullish run. It means that prices will continue to move upward.
The breakout is established when the higher resistance level forms a new level as prices retrace, gather momentum, and surge back higher triggering another breakout and a continuous bullish trend.
The stronger the spike on the flagpole, the higher the momentum of the chart pattern.
The chart pattern is facing upwards, which is the opposite of the bear flag facing downwards.
What does the Bullish Flag tell us?
A bullish flag is made up of the flag and the flagpole. The chart pattern has the structure of the letter F, just like other patterns have their distinct structures. The Double bottom has the shape of a W, and the double top pattern has an M pattern. The bullish flag F structure is formed after the price action of an asset trades a continuous bullish trend.
After the pattern shows a short-term high, the price trend starts a price retracement to the bearish side. The bullish flag is different from the bullish pennant because the latter rebounds the price action within a triangle or a wedge, and the Former rebounds price action within two parallel trend lines providing buyers with more momentum to initiate a new rally, firming new highs.
Note: there is a rule that states the rebound phase should never exceed the 50% Fibonacci retracement of the previous high (the flagpole). A price retracement that moves below 50% indicates that the uptrend has a weak momentum. A strong bull flag retraces between 38.2% to 50%, before moving past the upper termed line and forming new highs.
There are three main components vital to the formation of the bullish flag.
The price of an asset must have a bullish trend firming higher highs and higher lows.
There must be a price replacement between two parallel lines.
The consolidation only happens for a brief period. When the price breaks on the upside it validates the pattern, and when there is a price break in the opposite direction, it nullifies the pattern.
Strengths and weaknesses of the Bull Flag
It has been established that the bull flag pattern is a continuation pattern. The pattern helps traders know the present market trend. Every trader buys an asset with the hope of a price increase in the future and then they sell and make profits. However, it is advisable to wait for the price to break, or retrace before opening a buy position. This price pattern provides traders with a precise market trend.
Generally, the bull flag pattern is one of the best patterns to trade. As long as all the components are present. This pattern offers traders a good risk-reward ratio. Offering traders a well-defined price level.
Identifying the Bull Flag Pattern
The ability to identify the chart pattern in real time helps traders gain an advantage over the market. It helps readers identify the points and levels where retracement actions take place before the prior trend continues.
Firstly, some key components have to be present. Traders need to watch out for these features when looking to identify the bull flag pattern. The chart pattern must have a prior bullish trend, which is depicted by the continuous bullish candlesticks to the upside.
Followed by a rebound, depicted by price consolidation. This price correction happens between two parallel trend lines. But in some cases, it can be recorded, within pennants, triangles, or sideways trends.
The third phase of the bull flag pattern is the breakage of the flag, which offers the main entry signal.
The initial profit target of the bullish flag will be set close to the prior swing high, and the stop loss level will be set beneath the replacement level.
Also, the profits of this chart pattern can be set by estimating the difference in price between the base of the flagpole and the highest level of the flag. To properly estimate your profit target, you have to use the estimated move to the upside starting from the price break level.
The following steps have been outlined to help traders carefully identify the bull flag pattern:
Pinpoint the market trend moving to the upside. Generally, this market trend is represented by the formation of continuous bullish candlesticks moving to the upside. There are very few appearances of retracement candlesticks.
There should be a retracement action. This is represented by the price moving to the downside. A lower-low structure is present.
At this point, the breakout level is defined. The price trend continues an upward trend. Anything other than that invalidates the pattern.
How to Trade Bullish Flag Pattern
The trading bull flag pattern is straightforward and easy to use. As stated earlier, the chart pattern is formed when there is a continuous trend on the upside, and it gives traders a clear entry, stop loss and profit target levels.
Let’s take a look at some examples,
In a GBP/USD trade, a breakout occurs when the buyers resume their hold over the market. This is after the market has gone through a brief period of price consolidation.
The entry of this trade can be set either at the end of the breakout hourly candle or in some cases, you can decide to set an entry level after a retest. However, waiting for a retest can be dangerous, because the price might not return to the previous resistance. In this example, an entry point is set as soon as the breakout candles close over the flag’s resistance.
When setting your stop loss point, it is important to leave some room below the flag’s resistance. This is to protect your capital from being wiped out during a period of high volatility in the market.
The take profit level is estimated by meshing the flagpole. It is measured from the beginning of the breakout to the end of the flagpole. Some traders prefer to measure the body of the flag and use it in setting their profit level. Although both methods are generally acceptable, it is preferable to use the measurement from the beginning of the breakout to the end of the flagpole.
The endpoint of the trendline indicates the point where the take-profit level should be set.
PLACING A LONG ENTRY
A long-term position must be opened at the break of the flag, the stop-loss order is then set below the consolidation flag. The first target should be close to the first swing high. If the trend has a high momentum, the rally will continue.
However, managing a trade differs, it primarily lies in the trader’s plan and strategy. However, one of the best strategies to use when trading with this chart pattern is to close a part of the trade close to the previous swing high. Then, set your stop loss depending on the moving average or trendline.
Let’s take a look at a step-by-step guide to identifying the chart pattern and trading it accordingly.
For instance, opening a long position using a GBP/USD trade. Firstly, the prior trend must be bullish and have strong momentum. The bullish trend is represented by bullish bars rallying upwards with little or no corrective bars.
A consolidation must occur. This consolidation will give rise to the prevailing trend, and therefore it is important to wait for consolidation to occur before drawing the downtrend channel.
The log entry is activated when the price of the asset breaks the flag. Also, the stop loss is set, placing it on the opposite side of the flag pattern.
After the entry point has been activated, the next thing is to wait and see how the trade goes. It is essential to monitor your trades closely and ensure that all your limit orders are set correctly.
Managing your trade
Trade management is based on the trader’s strategy, and plan. The best way to take advantage of the pattern while maintaining a good risk-reward ratio is by closing a part of the trade around the target level and allowing the remaining position to run.
However, you can also choose to exit the entire trade at once by using the bullish price range of the flagpole. In this type of trade, the price continued to rally up, creating new highs.
It is important to note that most bull flag strategies have varied flag shapes and price formations. The period of replacements that gives rise to the flag can have the following shapes:
Bull flag pennant (this is different from the normal bull flag pattern, the trend lines of the flag converge during the period of consolidation).
What happens when a breakout occurs?
When a breakout occurs, events take place and these events take place in three stages:
- The first stage the consolidation stage should be properly defined within two parallel trend lines sloping downwards.
- In the breakout stage, the breakout phase happens when the price moves above the upper resistance line. The primary component of this breakout is that it is followed by a high volume.
- The confirmation phase is the confirmation of the breakout where the price closes above the upper resistance line, followed by a rally above the flag.
The consolidation phase completes the flag and it always has precise support and resistance levels. The consolidation phase shows stability between supply and demand, it is also regarded as a brief period of rest before price rallies with high volume.
The prior trend is bullish, and there is a higher chance of the trend prevailing followed by a bullish breakout. Generally, traders who opened positions during the previous rally still hold their positions. During the retracement phase traders who were not able to open positions take up the advantage to place long positions.
When the buyers are in control of the market, it shows that end is high, and the high demand will result in an imbalance in the market, propelling the price of the asset higher.
The Pros and Cons of trading the Bull Flag
- Trading this chart pattern comes with its advantages. The pattern offers a clear and definite price level for a long trade entry. It also forms a clear stop loss level, thereby offering the best support for good trade management.
- This pattern provides a good risk management network. This pattern offers asymmetrical risk-to-reward strategies, providing a potential profit target.
- The bull flag pattern provides a simple pattern to use when a market is trending. It helps traders know when the market is trending, the volume of the trend, and a possible break-out signal.
The main disadvantage of this chart pattern is that the pattern can be misinterpreted. This is because the pattern is based on a sideways market, not on a trending market. The pattern might not be accurate because it is not based on a training market.
To reduce this occurrence traders are advised to carefully study different types of bull flag charts to master their price action. This enables you to easily execute any trade using the pattern when the time comes.
Is the Bull Flag a reliable pattern?
Flag patterns are one of the most reliable chart patterns globally used by trades. These chart patterns are known for their accurate interpretation of market trends and price actions. They are also well known for helping traders pinpoint the best entry and exit points in a trade. The flag formations have similar occurrences, and can also show up in other patterns and existing trends.
AFTER A BULL FLAG WHAT NEXT?
When this chart pattern is valid, it indicates the configuration of a prevailing trend, and it indicates the increase in the price of an asset.
The bull flag pattern is one of the most sought-after chart patterns. Traders use this chart pattern to make good trade decisions. This chart pattern helps traders choose the best entry and exit points in a trade. It also helps a trader know the present market trend, and it also signals a price break out. However, it is not advisable to use this chart in isolation.
It is advisable to use other technical analyses in conjunction with this chart pattern. Using other chart technical indicators such as moving average convergence divergence with Fibonacci retracements can help provide more accurate trade signals. For instance, a Fibonacci retracement will indicate when the price retracement is exceeding 50%, which is a bad idea as the price retracement should never exceed 50%.