Key Questions Answered
- Flags are continuation patterns that form when the price of a stock or asset pulls back from the predominant trend in a parallel channel.
- A bull flag is a sharp, strong volume rally of an asset or stock that portrays a positive development.
- A bear flag is a sharp volume decline on a negative development.
- Traits of Flag Patterns include support and resistant levels, flag pole, breakout points and price projections.
What is A Flag Pattern?
Flags are continuation patterns that allow traders and investors to perform technical analysis on an underlying stock/asset to make sound financial decisions. These patterns form when the price of a stock or asset pulls back from the predominant trend in a parallel channel. Depending on the trend right before the formation of a shape, flags can be both bullish and bearish.
Bull flag vs. Bear Flag Patterns: What are the differences?
What is a Bull Flag Pattern?
A bull flag is a sharp, strong volume rally of an asset or stock that portrays a positive development. It forms when the price retraces by going sideways to lower price action on weaker volume followed by a sharp rally to new highs on strong volume. Traders favor this pattern because they are almost always predictable and true.
What does a Bull Flag Pattern look like?
Bull flags, like most continuation shapes, represent a bit more than a shorter lull in a bigger move. Hence, they usually form in the middle of the final move. Moreover, they occur as assets/stocks hardly move higher in a straight line for a long period because these moves are broken up by shorter periods.
How to Spot and Trade A Bull Flag Pattern?
Inexperienced traders and investors find it hard to identify a bull flag on a chart. However, there are a few things that anyone can look out for to trade this pattern successfully.
First, watch out for a preceding uptrend or a downward-sloping consolidation. Second, if a stock retraces more than 50%, it is unlikely that the chart will create a bull flag pattern. The ideal case of utilizing a bull market trading strategy is to make a move at the bottom of the flag or when the breakout is higher than the upper channel boundary. Lastly, look for a price to break higher with a length equivalent to the flag pole’s size.
What is a Bear Flag Pattern?
A bear flag is a sharp volume decline on a negative development, which takes shape when the price of an underlying asset rediscovers itself by going sideways to higher price action on weaker volume followed by a sharp decline to new lows on strong volume.
What does a Bear Flag Pattern look like?
Like bull flags, bear flags also turn out to be true most of the time. However, they represent a bit more than a brief lull in a bigger move lower. For a bear flag pattern, technical traders can derive a target by subtracting the flag’s height from the ultimate breakout level.
How to Spot and Trade A Bear Flag Pattern?
In order to identify a bear flag, traders need to find the flag pole that will represent an initial decline, which can either be steep or slowly sloping. Then the bear flag can be identified as a consolidation period in which prices may retrace or slowly channel upwards from the initial move. In this period, traders should wait for the price to follow a downward trend. As the price breaks the lower lows, the pricing level can be identified at which the target can be set.
Five Traits of Flag Patterns (Both Bull Flags and Bear Flags)
1 Resistance Level
It refers to a declining level of resistance that is parallel to the support level (bull flags). On the other hand, it also represents an up-trending level of resistance parallel to the support level (bear flags).
2 Support Level
It presents a declining level of support parallel to the resistance level (bull flags), or an increased level of support that is parallel with the level of resistance (bear flags).
3 Flag Pole
It is the distance from the point where the trend begins and stretches to the highest point on the flag (bull flags) or the distance from the initial point of the trend to the lowest point on the bear flag.
4 Breakout Point
It refers to a specific point at which the stock/asset price breaks up above the declining level of resistance (bear flag breakout point) or the point at which the asset/stock price breaks down below the uptrend level of support (bull flag breakout point).
5 Price Projection
It refers to the prediction price at which a stock’s price may fall after breaking out of the bear flag pattern or the price point where a specific stock’s price may rise after breaking out of the bearish flag pattern.
While a bull flag validates that the preceding uptrend will continue, the bear flag ensures that the preceding downtrend is likely to occur. Price patterns like this provide insight into what traders think and feel at specific price levels. Learning these indicators allows you to gain an edge over traders who rely heavily on just fundamentals or basic technical charts. However, like all indicators, flag patterns also work best when combined with other trading signals and indicators.