A trading target from the breakout is often derived by measuring the height of the preceding trend (flagpole) and projecting a proportionate distance from the breakout level. As we mentioned above, you want a bull flag to put in a series of lower highs so that you can buy the breakout of the most recent candle’s lower high. You then can set your stop at the lows of that prior candle. Bull flags can also occur on higher time frames like daily charts.
You draw these around the top and bottom of the consolidation. The target for a bull flag is derived by measuring the length of the flag pole and projecting it from the breakout point. This would yield a target price in ANSW of around $9.50. The initial rally comes to an end through some profit-taking and price forms a tight range making slightly lower lows and lower highs. Volume patterns may often be used in conjunction with flag patterns, with the aim of further validating these formations and their assumed outcomes.
Examples of Bullish Flags
If an upward move constructed the flagpole, the result is a bullish flag. If a bull flag’s resistance is broken, traders may be more certain that the price will continue to move by the length of the pole. On the other hand, if the bull flag’s support is violated, traders may conclude that the pattern is incorrect. A bullish flag pattern creates a downward sloping channel formed by a series of lower highs and lower lows. In contrast, a bullish pennant is a retracement pattern that creates a triangular shape that is formed by a series of lower highs and higher lows.
The bear flag is an upside down version of the bull flat. It has the same structure as the bull flag but inverted. The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower trendlines, which form the flag. Many small-cap assets are prone to explosive moves upwards, and the chart might simply create a double-top at the previous flag pole.
My Tips to Use This Strategy on Day Trades
Like all chart patterns, the bull flag has its pros and cons. Here’s an example of a simple bull flag chart continuation pattern. It is completely up to the trader when they want to sell. However, they should keep an eye out if the price breaks out of the consolidation range to the https://forexhero.info/software-engineer-vs-programmer/ downside. This can be a sign that the trend is reversing and that it is time to exit the trade. Another approach is to set a stop-loss order at a certain level below the current price, in case the trend does reverse and the price falls below that level, as explained in step 4.
While conditions weren’t perfect for this setup, we’ve seen similar stocks have massive short squeezes recently. The short sell entry was around 70 cents when the volume started to come back. The stop would’ve been at 75 cents, just above the pennant. Many traders are convinced their trade has to work — they don’t include an exit in their trading plan.
How To Trade a Bear Flag Pattern?
While both patterns can signal bullish continuation, the key difference between them is that the bull flag has lower highs, while the flat top breakout has equal highs. Learning how to identify and use the bull flag pattern is essential for anyone looking to up their trading game. It allows you to spot a continuation of positive price action, which, in turn, lets you make a lot of profit.
We discuss this strategy in detail in our post on liquidity traps. A bull flag also indicates that demand is stronger than supply. The “flag pole,” or initial uptrend, should be strong in demand. This demand then supports the ensuing pullback (flag). Once early bears realize the strength in the overall move, they give up their early shorting efforts. In this article, we’re going to dive into the fine details of the bull flag patterns.
Further Reading on forex trading patterns
Especially if it pulls back down to the breakout level. Pennants can be trickier to play than bull flags as they merge into a point. But as with the bull flag, wait for the volume to spike again with the next leg of the rally. If you draw trend lines around it, it looks like a rectangle.
The sideways consolidation tends to be more bullish than a bull flag … It doesn’t pull back as much. Longs also jump in when they see the stock rallying further. After the pullback, the stock starts to gain volume and rally for another leg up. When measuring from the bottom of the flag, the size of the follow-up rally is usually the same as the length of the pole. It’s smart to take some profits sooner, especially if the initial rally was strong. Read on to learn what the bull flag pattern is, how to use it, and real-world examples.
Note that the flag might be horizontal, but can often lean downward, demonstrating a countertrend to the prior spike upward in price. At the end of the countertrend (flag), a continuation of the upward trend is indicated by a rise in price above the upper boundary of the flag. A bull flag pattern is a bullish trend of a stock that resembles a flag on a flag pole.
- If the asset continues to move in the consolidation direction, it is doubtful that the chart would create a bull flag pattern since the flag pole trend has reversed.
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- The pattern occurs in an uptrend wherein a stock pauses for a time, pulls back to some degree, and then resumes the uptrend.
- This information has been prepared by IG, a trading name of IG US LLC.
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