By Nathan Ferguson
A flag pattern is a technical indicator used to indicate the price movements over a short-term contrary to the long-term pattern existing in the market. In technical analysis, flag patterns are considered indicators for the continuation of a pattern.
There are usually two kinds of flag patterns observed by the market: bear and bull patterns. However, the results and characteristics of both patterns differ. In this article, we will learn the meaning and concept of bull and bear flag patterns and how they could be traded in the market.
Understanding Bull Flag Pattern
A technical pattern created after a strong uptrend in the market is known as a bull flag. It appears when the price is submerged into the sloping channel moving downwards. In this pattern, two parallel lines rising upwards are created. The pattern could form a wedge or a pennant if the lines converge.
It indicates the consolidation period where the traders are less willing to buy or sell their assets. However, the trading volume increases when the price increases above the upper trendline of the flag pattern.
How to Trade a Bull Flag Pattern?
Traders may expect a breakout as the price moves toward the upper trendline. Therefore, they might choose a long position at the end of the bull flag. However, traders can confirm the breakout before making any move in the market. Moreover, they should also place a stop loss below their entry positions to avoid any loss in the bull flag pattern that is not valid.
Understanding Bear Flag Pattern
The opposite of the bull flag is the bear flag pattern. It indicates an upward consolidation while showing the downward movement of the pattern. The upward graph is the bear flag pattern, whereas the downward move is the flagpole. When the trading volumes decline, the period of bear flag formation may coincide with it.
How to Trade a Bear Flag Pattern?
Traders might open a short position from the pattern’s upper trendline and then pull back. However, they can also wait for the increasing volumes as the prices move below the lower trendline of the graph. The peak value of the flag pattern is subtracted from the size of the flagpole to measure the short target.
However, in a few cases, it might be a fake indicator when the breakdown occurs below the lower trendline of the pattern. One might place a stop loss above the point of entry to avoid any loss in such fake scenarios.
Suggestions Before Trading Bull and Bear Patterns
Traders can benefit from the bull and bear patterns if they use them correctly. Here are some suggestions that should be considered before trading these patterns.
- Completion of Pattern
The traders must ultimately allow the flag pattern to form before entering any trade.
- Look for Confirmation
It is recommended to confirm the formation of a pattern before entering the trade. For this purpose, traders can look for other indicators or technical tools in the market. If the price breaks out in the direction of the previous trend, it confirms the formation of a flag pattern in the market.
- Setting a Stop Loss
Before trading a bull or bear flag pattern, it is essential to set a stop loss. In some cases, the price may move opposite to the previous trend, leading to a loss. Therefore, the probability of loss can be reduced by putting a stop-loss barrier.
- Risk Management
During trading bull or bear flag patterns, risk management is vital. For this purpose, the trader should invest a limited amount in trade. Moreover, they should also distribute their investment among several trading instruments and strategies.
Conclusion
Flag patterns are considered one of the most reliable technical indicators in the financial markets as they help traders predict upcoming trends. Bear and bull flag patterns differ in characteristics; however, they are used in the market to predict unpredictable price changes and movements.