Skip links

Bull Flag Vs Bear Flag: Secrets To High Probability Trades

Bear Flag Pattern

As it is a continuation pattern, it indicates that the downtrend will continue and the price of the stock is likely to fall further than it already has. No closes occurred below the blue lower support level of a bear flag which signals that buyers were still interested in buying the asset at this price. Even if you’re sure that your flag is going to see a continuation, it’s always worth paying attention to risk management as part of your strategy. Bull flag patterns are a great setup for new traders to learn because they are easy to spot and trade once you understand the mechanics behind them. If we have a big pullback, then squeeze right back to the highs we’ll sometimes see a double top formation, or a U shape on the chart. In the examples below you will see some perfect bull flags, but you will also see some sloppier bull flags.

  • The volatility of the crypto market means any news can have more effect on shorter timeframes.
  • The key thing about the bear flag chart pattern strategy is that it’s a strategy that works only in a bear market and it works beautifully.
  • The high volume into the move lower and low volume into the move higher, are suggestions that the overall momentum for the market being traded is negative.
  • The most common is to place a stop below the consolidation area.
  • In conclusion, we can ask the question of what a Bull or Bear Flag Pattern indicates with regard to predicting future price movements.
  • Like any other instrument, the bear flag has advantages and disadvantages.

The initial stop-loss can be placed under the upper trendline on uptrends and lower trendline on downtrends, as a precautionary trail stop. However, some traders may wish to give it more room to avoid wiggles and place their stop at or under the lower trendline on uptrends and lower trendline on downtrends. Using the second trendline stop-loss may be more costly but it avoids wiggles at the first trendline from triggering premature stops. To offset some of the risk, lighter shares can be used when trailing the second trendline stop-loss.

How to trade the flag pattern

As a chart pattern itself, the bear flag makes sure that traders are able to identify the stage which the downtrend is currently in. As it’s the case with a bull flag, its bearish counterpart consists of the flagpole and a flag. The former is constituted after the price action trades in a downtrend, making the lower highs and lower lows.

How do you read a bear flag pattern?

  1. The flagpole – the asset's price must trade lower in a series of the higher highs and higher lows;
  2. Flag – a consolidation must take place between two parallel trend lines in an uptrend;
  3. A breakout – a break of the supporting trend line signals the activation of the pattern.

Usually, the bearish volume increases as the flag’s pole is forming, until the consolidation. This indicates that the bearish sentiment Bear Flag Pattern is strong and that the consolidation might be temporary. However, like all pattern formations, bearish flags are not immune to failure.

What Is a Bear Flag Pattern? How to Use it to Trade Crypto Effectively

There are many price action patterns that traders use to catch moves, but none of them catch my eye quite like bullish and bearish flags. If the asset continues to move in the direction of the consolidation, it’s unlikely that the chart will form a bull flag pattern, as the trend of the flag pole has continued to reverse. If the asset instead moves in the direction of the flag pole, then a bull flag pattern has been identified. A bull flag pattern 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. An example of a bear flag chart pattern can be seen in Ethereum from mid-March to early April 2020.

Bear Flag Pattern

In a bearish flag pattern, the volume does not always decline during the consolidation. The reason for this is that bearish, downward trending price moves are usually driven by investor fear and anxiety over falling prices. The further prices fall, the greater the urgency remaining investors feel to take action. The patterns also follow the same volume and breakout patterns. The patterns are characterized by diminishing trade volume after an initial increase. To enhance the relevance of the bear flag, you can rely on technical indicators like moving averages and keep an eye on the volume indicator.

Zero commission fees for trading any crypto CFD

In our example, we are presented with both standard entry options after the breakout occurs. The first option results in the opening of a trade as soon as the breakout candle closes below the flag. Many traders are too eager to enter the market and frequently “jump the gun” before the actual breakout has even occurred.

  • The bearish flag can be observed in stocks that are experiencing a downtrend.
  • First, you have to determine the flag pole, which coincides with the initial price decline driven by strong bearish momentum.
  • This pattern is one of the few patterns that show traders where to open a position, what profit to expect, and where the stop loss should be.
  • Most traders will enter a flag pattern trade on the day after the price has broken beyond the trend line.

You can see an example of the bearish flag pattern in the chart below. One of the first experiences most day traders learn when they start trading is price action trading.

Why do Flags occur in a Bull Flag and Bear Flag Patterns? – Building Foundation

In a bull flag, you’d place a buy order above the resistance line. Remember that no matter how good you get at reading bull and bear flag patterns, there are times when the trade will just not work out. That being said, a sound and well-executed strategy based on the identification of flag patterns with proper risk management will benefit your portfolio in the long run. If you’re not confident about applying bull and bear flag patterns to real-world trades just yet, Phemex offers a fantastic paper trading platformthat you can use to hone your skills. So, a bull flag pattern is characterized by an initial sharp rally and then by a period of consolidation. With most bull flag patterns, the volume increases when the pole is being formed, then drops during the period of consolidation. Though the following breakout does not always feature a high surge in volume, an increase in volume can show that there has been an influx of new buyers.

Bear Flag Pattern

Meanwhile, “Redistribution” and “Reaccumulation” go into much more depth into explaining the “WHY” the consolidation is taking place right now and almost forecast how long this consolidation would last. They give you the “Market Narrative” and help you forecast more accurately where and when to place your entry to get in. As their name indicates, they are “Patterns”, which means they are phenomena or the result of the price forming this shape that we call “Bear Flag” and “Bull Flag” Patterns. They are followed by the consolidation in price that is called “Flag“. We also refer to it as “Redistribution” for Bear Flags and “Reaccumulation” for Bull Flags.

Bear Flag and Bull Flag Patterns Explained

Flag patterns are accompanied by representative volume indicators as well as price action. Risk sentiment is a term used to describe how financial market participants are behaving and feeling. What traders choose to buy or sell means balancing how much they are… You can short the break of the trendline of that bearish flag. The flag shows that an existing trend has reached the oversold or overbought level. Thus, after a steep price movement, the price will move in the opposite direction for a while. However, trends can help a trader to spot market movements — and come up with trading strategies that make big bucks when used correctly.

After a strong downtrend, the price action consolidates within the two parallel trend lines in the opposite direction of the downtrend. Once the supporting trend line gets broken, the is activated as the price action continues trading lower. The bear flag resembles an upside-down flag on a price chart. First there is a strong move down and then a minor price bounce . Under the conventional wisdom of technical analysis (the art of price-chart reading), an asset’s price usually drops roughly the length of the pole following the flag breakdown.

Leave a comment

This website uses cookies to improve your web experience.