It’s a candlestick chart pattern that allows you to make money on a bullish breakout. Waiting for a bull flag of the nine ema gives you the best entry, and you can use the nine ema for an exit point. Traders of bull and bear flag patterns might hope to see the breakout accompanied by a high-volume bar. A high-volume bar to accompany the breakout, suggests a strong force in the move which shifts the price out of consolidation and into a renewed trend. A high-volume breakout is a suggestion that the direction in which the breakout occurred, is more likely to be sustained. In a bull flag formation, traders will hope to see high or increasing volume into the flagpole (trend which precedes the flag).
Trading the Bull Flag Pattern
The stop-loss order will automatically close the trade to reduce losses if the price swings against your position and breaks below the lower edge of the flag. Outline another trend line that connects the price action highs during the consolidation phase. Check out Pepperstone here (check out eToro if you’re a US resident) to get your account started on the right foot – their platform makes charting and executing bull flag trades easy. For example, bearish pennants indicate continuation of the downtrend, with the downside breakout providing a downside price target.
Understanding the Schaff Trend Cycle (STC) Indicator: A Powerful Technical Analysis Tool
After that, I refuse to enter, fearing momentum and interest waning. You can pull the trigger and begin buying when the stock price breaks in the consolidation area. If you’re a first-time trader, you must avoid chasing stocks like the plague. Not only is it an account killer, but it’s also a confidence killer. I’d hate to see you lose faith in yourself because you blew it all in one trade. One of the great things about sticking with a strategy like the bull flag is that you become a master at it.
How to Identify and Use the Bull Flag Pattern in Trading?
In my experience, the best time to trade the Bull Flag Pattern is when it occurs just after a breakout. Recently, we discussed the general history of candlesticks and their patterns in a prior post. We also have a great tutorial on the most reliable bullish patterns. Pay attention to how the inside candles formed during the flag. They put in consecutive lower highs until the breakout day, which took them out. If you are scalping early morning momentum, you might want to trade from the 1-minute charts.
Strategy 3 – Complex Moving Averages
A Bull Flag is a powerful pattern seen on price charts, indicative of a continuation in an uptrend following a brief period of consolidation. This formation is particularly interesting in stocks showing strong upward momentum, as it suggests that after a pause, the bullish trend is likely to resume. An ascending bull flag is a chart pattern found in technical analysis that signals a continuation of an uptrend. Now, we are going to explore some bull and bear flag trading strategies, using different trading concepts and tools to improve our decision-making. Trading bull flags by themselves, without additional confluence signals, is typically not recommended. As with all chart patterns, it is usually best to trade chart pattern-based strategies in a complete trading system with additional rules and concepts.
If the price breaks out of a range, then wait for a Bull Flag Pattern to form. In such market conditions, there is a lot of “meat” for the trend to continue and the only way to ride it is to trail your stop loss. However, I prefer to trail my stop loss until the market takes me out of the trade.
During a pullback, the price dips below all three moving averages, signaling a significant market drop. Entering a long position at this point would be too early as the price is showing a bearish momentum structure. Using trendlines can often be more subjective because trendlines can be drawn in many different ways. Although we are going to explore bull flag trading strategy other bull flag trading strategies later in this article, I want to introduce a more objective trading approach at this point. Many traders make the mistake of chasing the price as a bullish trend keeps pushing higher during the impulsive wave. Such a trading approach usually doesn’t perform as well because of a high likelihood of a pullback.
This pause in the uptrend provides time for the market to digest the previous gain. It also allows momentum to rebuild, setting up the next advance higher. The breakout from the bullish flag chart pattern signals the uptrend is resuming. The flagpole is the initial upward price movement that occurs before the consolidation period.
The most common implication of the bull flag pattern is to look for the right time to hop into the trend. Now, I’m not expecting us to see the same thing all the time because the bull flag pattern is a discretionary trading concept. Knowing and understanding the bull flag momentum strategy is crucial for a successful day trader. But what works for one person may not work for another, so it pays to learn a few simple ones initially.
However, traders should also be aware of potential pitfalls, such as false signals and unexpected news events. As shown by the bull flag chart pattern above, traders have been buying risk through commodities, the stock market, and risk-based currencies. As a result, the AUD performed well against most other currencies in part because it offers a higher rate of return owing to its interest rate. Hence, traders have a fundamental back drop to support the technical picture for additional strength in AUD.
- The key is to wait for the price action to break above the resistance level of the flag, signaling a continuation of the initial uptrend.
- The type of price action that exhibits in the pullback is what separates the Flag Pattern from a normal pullback.
- The high volume confirms the breakout and suggests a greater validity and sustainability to the move higher.
- This shows less buying enthusiasm into the counter trend move.
- Typically, the flag portion of the bullish flag pattern doesn’t move perfectly horizontally.
74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. If you observe the EUR/USD chart below, you can see each formation part. This is for informational purposes only as StocksToTrade is not registered as a securities broker-dealer or an investment adviser. If you want to discover whether the market is a trending or a mean-reverting market, you can check out the first section of this article. Give your trade more room to breathe by setting your stops a distance away from the market structure.
The strong directional move up is known as the ‘flagpole’, while the slow counter trend move lower is what is referred to as the ‘flag’. There are slight variations of the pattern — like the flat top breakout and pennant. So it’s important to decide if you want to learn to trade those as well. The flagpole gave a target of under 60 cents, which would have been eventually reached at the end of the day as the stock slowly faded. That’s followed by a consolidation period where volume drops off substantially and the stock pulls back.
If we are astute traders who understand support and resistance, we could have gauged the quality of the bull flag as a small consolidation along the way to the resistance area above. This would give us confidence, not only that the move might not be finished, but also as to where our target could be set. If you can identify key levels on a chart where shorts could be underwater, then see a bull flag form, it could be indicative of a coming squeeze. We discuss this strategy in detail in our post on liquidity traps. For example, the best bull flags occur at the start of a new uptrend.
Such formations form the basis for statistical advantages in the market. With defined entry trading strategies, you can confidently buy into bull flags as the pattern emerges and the buying momentum returns. Just remember to wait for clear confirmation before pulling the trigger on this bull pattern.
Buyers were in clear control during the pole, aggressively bidding prices higher while the consolidation under the flag represents a pause, not a trend reversal. The flagpole of the bull flag is usually what we use in measuring the profit target of the pattern. For instance, if the flagpole is 10 pips long, that same distance from your entry is what you’ll use as your profit target. Read this article because it goes in-depth on trading bull flag setups, providing traders with actionable insights and clear strategies. Because when the market is in a range, it will have to break out eventually and form a bullish flag pattern. In this example you have AMC breaking out of its prior trading range on increased volume.
