What is Bull Flag Pattern and How to Use It in Trading | Litefinance


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.

At the beginning of their career, many traders and investors struggle to make sense of technical analysis patterns – many factors are involved in the identification of a pattern, for example, how it appeared or at what level it was formed. In the bull flag pattern, for instance, the flagpole is formed first. Technical analysis patterns have many such nuances, but it’s really not as complicated as it seems at first glance.

The article covers the following subjects:

What is the bull flag and how does it work?

Bull (bullish) flag is a classic uptrend continuation pattern. The essential characteristic of this pattern is a short downward consolidation, after which the instrument shows active growth.

In the chart, the bull flag pattern looks like a narrowing triangle or rectangle, which demonstrates the decrease in volumes and indicates that market participants are locking in their positions. This allows traders to find a good entry point – after the narrowing of the range, a momentum breakout of the upper side of the triangle will follow.

Bull flag pattern example on the Forex market

What does a bull flag look like?

In the picture above you can see the EUR/USD currency pair with clearly visible elements of the Bull Flag chart pattern.

The example is based on the Tesla Inc. stock chart.

Advantages and disadvantages of bull flag pattern

Like other patterns, the flag has its unique characteristics. Below is a detailed analysis of the main advantages and disadvantages of the pattern.

Advantages

Disadvantages

The pattern is easily identified in the chart

On smaller timeframes, the pattern may show false breakouts

Entry and exit points are easier to find than in other patterns

The pattern may take a long time to form

This pattern occurs on all markets

 

Advantages

  • You won’t confuse the flag with other patterns thanks to the characteristic flagpole. This is why this pattern is easy to identify in the chart.

  • The entry point is also easy to find – you’ll see the triangle or rectangle, from which the price breaks out. The exit point is similarly easy to identify by the length of the flagpole.

  • The flag points to the continuation of the bullish trend and is often seen on the stock and currency markets.

     

Disadvantages

How to identify the bull flag chart pattern

One should be careful when identifying the bullish flag in the chart – several important factors must be present to form this pattern.

The flag pattern must meet the following criteria:

  1. First, an impulsive bullish trend – the flagpole – is formed.
  2. Downward consolidation develops next, which is represented by the flag structure itself.
  3. The short-term downward price movement is by 38% at most.
  4. You can open buy trades when the upper limit of the descending channel is broken.

Step-by-step instructions for identifying the flag in the chart

Step 1 – Flagpole

Step 2 – Flag

Next, the downward consolidation, or the flag itself, is formed.

Step 3 – Breakout

After the retracement, we are waiting for the breakout of the upper border of the formed rectangle.

Step 4 — Buy and Stop Loss

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.

Step 5 — Taking profit

You can close the position based on the length of the flagpole.

Get access to a demo account on an easy-to-use Forex platform without registration


Go to Demo Account

Bull flag vs Bear flag

Bull and bear flags are both strong continuation patterns. A bearish flag is the complete opposite of a bullish one, it means a trend reversal at the top. The pattern is easy to distinguish by a sharp change in the previous trend direction and a slight upward consolidation, after which the downtrend continues.

Below you can see these patterns in a real EUR/USD chart.

How to use a bull flag in trading – best strategy

The price breakout is preceded by large volumes, so when using the pattern, make sure to monitor their changes.

Trading based on the bull flag pattern is easy. All you need is to be familiar with the principles:

1. Entering the market.

You can open a long position when, after a downward consolidation, the candle closes above the upper limit of the trend.

2. Setting a stop loss.

Set the stop loss just below the formed flag.

3. Take profit.

Let’s evaluate how much the price initially rose before the downward consolidation. Let’s say 70 points. This means that we set take profit 70 points from the point of breakout of the upper border of the consolidation.

Let’s look at some bull flag trading strategies.

Pending Order strategy

The point of the strategy is to identify the optimal entry point with the help of a pending buy order.

  1. First, we wait for the formation of the first highs and lows.

  2. Then a range forms from additional high and low points below the previous ones.

  3. You need to draw resistance and support lines through four points.

  4. Place a pending buy order at the level of the first high.

  5. Set the stop loss between the first high and low.

The key feature of the strategy is the ability to move the pending order to the second price high, which is located a little lower, and place the stop loss in the center between the second high and low. Also, with this strategy, you don’t have to track the price dynamics.

Trading with the Market strategy

This method is similar to the first one. The only difference is that you open the trade manually.

  1. Identify the Flag pattern in the chart and the levels of resistance and support using the same method.

  2. When the resistance level is broken, open a buy trade.

  3. Set stop loss just below the support level.

Trading with the market is aimed at minimizing risks and making a buy trade at a better price during the breakout of the resistance line.

Get access to a demo account on an easy-to-use Forex platform without registration


Go to Demo Account

Key tips about bull flag chart pattern

After testing this pattern myself, I would like to mention some nuances you should be paying attention to when using it:

  • To set stop loss and take profit correctly, you should stop looking for the pattern on different time periods. Pick the one timeframe on which the pattern is clearly defined.

  • Do not open a trade without setting a stop loss – there is a risk of a false breakout.

  • The longer the consolidation, the stronger the momentum will be.

  • If the price has gone up far, don’t expect a pullback to the support level. In this case, it is more efficient to trade using the momentum breakout method.

  • This pattern is mostly triggered after a breakout or at the moment of rapid growth.

     

Conclusion

Knowing how to use the flag figure will contribute to your confidence when trading on the financial market. But remember that when opening a position, you cannot only rely on technical analysis patterns – they cannot provide a 100% complete and accurate picture. It is important to use fundamental analysis as well. This is the only way to make profitable trades.

I should note that this pattern is visible most clearly on larger timeframes, since the pattern may behave incorrectly on smaller timeframes. In addition, it is easy to confuse it with other technical analysis patterns. Therefore, it is recommended to use candlestick analysis in combination with this pattern.

The aim of this article was to study in detail the flag pattern, its main advantages and disadvantages. In addition, we looked at the differences between the bull flag and the bear flag. Now you can apply this knowledge to practice.

One of the most convenient platforms for improving your trading skills is LiteFinance.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

Rate this article:

value ( count title )





Source link

Leave a Reply

Your email address will not be published.