Bull and bear flags are popular cost patterns identified in technical analysis, which traders frequently use to recognize trend continuations. In this post we look at how to trade these chances.
Bull and bear flag developments are rate patterns which occur often across varying timespan in financial markets. These patterns are considered extension patterns in technical analysis terms, as they have a habit of occurring prior to the trend which preceded their formation is continued.
In this post, we look at how to recognize and trade these patterns by searching for entries and exits through breakouts, proportional targets, failure levels and volume verifications.
The anatomy of a flag formation
A flag pattern is highlighted from a strong directional relocation, followed by a sluggish counter trend move. The above chart highlights a bull flag.
The strong directional go up is known as the 'flagpole', while the slow counter pattern move lower is what is described as the 'flag'.
A bullish flag development
In an uptrend a bull flag will highlight a slow consolidation lower after an aggressive relocation higher. This recommends more buying interest on the move up than on the move down and mentions the momentum as remaining favorable for the security in question.
Traders of a bull flag may wait for the cost to break above the resistance of the combination to find long entry into the marketplace. The breakout suggests the trend which preceded its formation is now being continued.
A trading target from the breakout is frequently obtained by determining the height of the preceding pattern (flagpole) and predicting a proportional range from the breakout level.
In terms of handling danger, a price relocation below the assistance of the flag formation might be used as the stop-loss or failure level.
A bearish flag formation
A bear flag will look like an inverted bull flag.
In a sag a bear flag will highlight a slow debt consolidation greater after an aggressive relocation lower. This recommends more selling enthusiasm on the move down than on the move up and mentions the momentum as remaining unfavorable for the security in question.
Traders of a bear flag may wait for the price to break listed below the support of the debt consolidation to discover short entry into the marketplace. The breakout recommends the trend which preceded its development is now being continued.
A trading target from the breakout is often derived by measuring the height of the preceding pattern (flagpole) and forecasting a proportional distance from the breakout level.
In regards to managing danger, a rate move above the resistance of the flag development might be used as the stop-loss or failure level.
Trading bull and bear flags with volume patterns
Volume patterns might often be utilized in conjunction with flag patterns, with the objective of additional validating these formations and their presumed outcomes.
Trading bear flags with volume verifications
In a bear flag formation, traders will hope to see high or increasing volume into the flagpole (pattern which precedes the flag). The increasing or higher than typical volume accompanying the downtrend (flagpole), recommends an increased sell side enthusiasm for the security in question.
The flag, which represents a consolidation and sluggish pullback from the drop, should preferably have low or decreasing volume into its formation. This reveals less buying interest into the counter pattern relocation.
The high volume into the move lower (flagpole) and low volume into the move higher, are tips that the total momentum for the marketplace being traded is unfavorable. This advances the presumption that the preceding drop is most likely to continue.
The above chart highlights high and increasing volume levels into a downtrend, recommending a strong sell side momentum, while the chart below highlights low and declining volume levels into the flag consolidation, showing decreased interest into the steady move higher.
Together these charts illustrate the favourable volume patterns traders will be aiming to identify into a bear flag, which assumes ongoing price weakness to follow.
Trading bull flags with volume confirmations
In a bull flag development, traders will intend to see high or increasing volume into the flagpole (pattern which precedes the flag). The increasing or higher than usual volume accompanying the uptrend (flagpole), suggests an increased buy side interest for the security in question.
The flag, which represents a debt consolidation and sluggish pullback from the uptrend, ought to preferably have low or decreasing volume into its formation. This reveals less buying enthusiasm into the counter trend move.
The high volume into the move higher (flagpole) and low volume into the move lower, are recommendations that the general momentum for the market being traded is positive, enhancing the assumption that the uptrend is most likely to continue.
The above chart highlights high and increasing volume levels into an uptrend, recommending a strong buy side momentum, while the chart below highlights low and decreasing volume levels into the flag consolidation, revealing decreased interest into the gradual relocation lower.
Together these charts show the beneficial volume patterns traders will be aiming to recognize into a bull flag, which presumes continued price gains to follow.
High volume breakout
Traders of bull and bear flag patterns might wish to see the breakout accompanied by a high-volume bar. A high-volume bar to accompany the breakout, recommends a strong force in the relocation which shifts the price out of combination and into a restored trend. A high-volume breakout is a tip that the instructions in which the breakout took place, is more likely to be sustained.
The listed below chart highlights an upside breakout from a bull flag pattern, which is accompanied by a high-volume bar. The high volume confirms the breakout and suggests a greater credibility and sustainability to the relocation higher. In a drop the very same concept or recommendations would use, ie a high-volume downside breakout from a bearish flag debt consolidation, would mention a higher credibility and sustainability to the move lower.
Bull flag and bear flag patterns summed up
A flag is thought about an extension pattern in technical analysis
The 'flagpole' represents the trend which precedes the 'flag'.
The 'flag' highlights a combination after a trend.
A bull flag suggests that the preceding uptrend will be continued.
A bear flag recommends that the preceding drop will be continued.
The height of the flagpole projected from the breakout level will arrive at an in proportion target.
When trading a bull flag, traders might use a relocation below the lower level of assistance as a stop-loss or failure level.
When trading a bear flag, traders might use a move above the upper level of resistance as a stop-loss or failure level.
Volume patterns are often used to verify bull and bear flag price patterns.
In a bull flag, rising volume into the flagpole and declining volume into the flag verifies the pattern and assumptions that the preceding uptrend will be continued.
In a bear flag, rising volume into the flagpole and decreasing volume into the flag verifies the pattern and presumptions that the preceding sag will be continued.
A high-volume bar on a flag breakout, suggests a higher likelihood of the patterns success.
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