It is crucial to use effective chart patterns in technical analysis. Almost all levels of traders employ different chart patterns to identify market trends and anticipate market moves. Whether you trade the stock market or try your fate in forex, charting patterns have always had its place in the traders’ tool belt. This piece discusses one of the most popular charting patterns called Bull Flag in detail.
What Is Bull Flag?
A bull flag is a chart pattern that signals an entry into an uptrend. Many professionals adopt this pattern to flow with the trend. The bull flag pattern helps you participate in the present market trend. That implies you may use the data to find entry points where the risk is low compared to the potential gain. Visually, this pattern displays a solid upward movement (the pole) followed by a flag-shaped consolidation.
The flag is commonly a horizontal rectangle and is sometimes seen with a slant formation. Another variant is the bullish pennant, which involves consolidating a symmetrical triangle.
The psychology behind the pattern holds more significance than the flag’s appearance. Despite a robust vertical rebound, the stock refuses to fall much as bulls grab any available shares. That’s generally followed by a forceful upward rise, measuring the previous flag pole’s length. These chart patterns are called bear flags and pennants when used in reverse. Bull flags generally appear during a new market rally.
Flag patterns include five essential characteristics:
- The preceding trend
- Volume pattern
- Consolidation
- Breakout
- Confirmation
Bullish Flag Examples
Let’s use price charts to understand the bullish flag concept and visual appearance.
Emerging Bull Flag
A breaking out flag is a good example of an emerging bullish flag. However, the overall pattern is more important than the fact that the flag doesn’t make a perfect rectangle. It rises sharply to create the flagpole, then settles firmly. Bulls don’t seem to be waiting for better pricing.
We can calculate the bull flag target by projecting the flag pole’s length from the breakout point. That’s how we get the target price of roughly $9.50.
Image Source: StockCharts.com
Rectangular Bull flag
Below is a pricing chart for America Service Group Inc. Also, the candles’ lengthy lower tails show definite purchasing every time it drops below $10. Volume has increased during the last two sessions. The volume pattern is a frequent feature of bull flags.
Volume usually spikes as the stock develops the flagpole. A pricing consolidation causes a drop in volume. Volume often increases somewhat when the bull flag is broken, but not drastically.
Image Source: StockCharts.com
Breakout Bull
The price chart of Cantel Medical Corp. looks to have broken out of a bull flag formation. CMN closed over the flag’s top near $15. While CMN may resume its parabolic advance, it is common for a stock to retest the breakout point after a few sessions, allowing for a second entrance.
Stop-loss protection for this sort of trade is flexible. For example, long-term traders frequently employ stop levels beneath the entire flag, while others use two-bar stops.
Image Source: StockCharts.com
Tight Bull Flag
The price chart of CF International Inc. shows a very tight bull flag. The tighter flags often perform better and have more manageable stop-loss levels.
Bull flags usually clear out in three weeks. More extended periods form a triangle or rectangle.
Following a consolidation week, ICFI pushes over the resistance region at $24.50, fitting the usual trend and pointing to a possible rally.
Image Source: StockCharts.com
Difference between Flag & Pennant
Flag chart designs resemble pennant patterns at first glance. Both flag patterns occur after a substantial price movement followed by a horizontal price movement. They usually last 1-3 weeks. However, there are various discrepancies among the similarities.
Pennants are usually triangular. Converging trend lines form them by successive highs and lows. It’s consolidated in a pennant shape, with sinking resistance & rising support. Generally, it would help be best to utilize pennants as part of confirmation along with other technical indications. Using the RSI (Relative Strength Index) to moderate during consolidation and attain oversold levels can be viable.
A flag pattern occurs when a substantial spike (or decline) is followed by a tight price range (or fall). A flag usually helps a candle close above a support or resistance level.
To trade successfully with flags or pennants, you should always use volume to determine your entry and exit locations. It will help you confirm breakouts and allow you to speculate on the following momentum.
Finally, there is no time lined defined for the pattern formation. Hence, waiting for the right time is all you can do.
How to Identify a Bull Flag Chart
The flag pattern looks rectangular; hence it might be difficult for new traders to spot it. Therefore, the need to be careful while identifying the bull flag pattern. Below are some tips to help you Identify the bull flag pattern quickly.
Step 1: The bull flag should have an uptrend since it’s a continuation pattern and isn’t a reversal.
Step 2: When the correction begins and the price drops. You may say it’s a bull flag.
Step 3:The retracement should not be less than 38%, and it’s not a bull flag even if it is below 50%.
Step 4: Draw lines parallel to the pattern.
Step 5: The underlying security price should surpass the pattern’s upper border.
How to Trade The Bull Flag?
After identifying the flag pattern, you should enter a position when the downtrend loses momentum.
A Long Entry
In this case, the long entry is at the flag’s break, while the stop level is below the flag’s consolidation. Keep previous swing high as your primary objective. A strong market trend would make the price continue moving in the same direction.
Trade management differs. It depends on each trader’s style. Still, closing a position around the previous swing high could be a sensible move. You can then define a trailing stop based on trend line or moving average.
Below is an example of a BTCUSD weekly chart showing how to detect and trade a bull flag.
1) As stated previously, the dominant trend must be positive. This momentum is frequently framed by a series of bullish bars with slight correction.
The picture below shows significant directional movement with just minor retracements.
2) We must await consolidation. In this situation, a downtrend channel may be created once a lower high is reached, and we can prepare for a flag break.
The price breaks the flag, triggering the long entry. You may set a stop loss on the other side of the flag’s pattern.
The red region shows the possible risk (loss), while the green area reflects the potential reward (gain).
Activating the entry is followed by a waiting period. In this case, the price jumps to the last swing high.
Trade Management
Traders need to manage their trades based on their risk appetite. You can close a portion of your position near the target region and keep the rest open.
You can also project the price range of the flagpole upwards and close the entire trade. The price may continue rising to new highs.
Pros and Cons of Bull Flag
The bull flag has the following pros and cons.
Pros
- Traders may find it while trading any market, including forex, stocks, indices, cryptocurrencies, etc.
- There is no specific timeframe to spot the bull flag. Instead, you may find it on any period, such as M1, H1, W1, and MN.
- It helps clients find an optimal entry-level
- It provides uptrend continuation signals to clients.
Cons
- Newbies might find it challenging to interpret.
- It doesn’t frequently appear on charts.
- It might become difficult for traders to distinguish between Bull flags and rectangular patterns.
- It may produce false signals sometimes.
Conclusion
No chart pattern or indicator can offer absolute assurance concerning whether a trend will reverse or continue. Therefore, it’s best to use this if it fits your strategy, then follow your trading plan and let probability play out. If you’re looking to learn more about indicators, candlestick patterns, etc. do check out the Traders Central Academy.
If you’re looking to get funded with a large capital, do check the funding options available at Traders Central. You can get funded with the instant funding plan or go through a challenge and get funded depending on your preference.