The appeal is easy to understand- as one of the most straightforward chart patterns, bear flags are both easy to spot and easy to use. To chart a Bear Flag Pattern, traders should identify a sharp decline in price (the flagpole) and a period of consolidation with a downward-sloping trendline (the flag). Traders should also analyze volume to confirm the pattern’s reliability. Advanced techniques, such as combining bear flag patterns with other technical analysis tools, can increase the reliability of trades. Variations of the bear flag pattern, such as bearish pennants and descending channels, can also provide additional trading opportunities. A bull flag is a bullish continuation pattern that appears during an uptrend.
Then, it would be best if you implement the Moving Average indicator. If the distance between the pattern and the Moving Average is big, it’s better to avoid trading the pattern. Although the price will move down, it’s difficult to define the Take-Profit level as the upward reversal https://www.bigshotrading.info/ will occur soon. The image below shows a bear flag occurring on an actual candlestick chart. You will note that the text appearing on the image points out the sharply declining flagpole. The height of this flagpole is used for measuring the chart pattern’s final objective.
Combining Bull and Bear Flags With Other Indicators
Not all chart patterns are created equal – what’s more, not every chart pattern is legitimate. Simply seeing something that looks like a bear flag isn’t a guarantee that a downtrend will continue – traders need to use other metrics to determine whether the pattern is legitimate. A flag is a component of a flag pattern, such as a bear flag or bull flag. The flag is a period of consolidation following a sharp move in the opposite direction of the prevailing trend, forming the flag pattern’s basis. When a bear flag pattern fails, the stock price fails to achieve the price target or reverses before reaching the height of the flag pole.
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How can we distinguish between a flag pattern and a trend reversal?
The difference is within the rectangle pattern, the price action is moving horizontally in a much bigger trading range. The bear pennant is the bear flag’s closest relative out of all the chart patterns. The two patterns give the same signal – bearish continuation, and they’re so similar that the untrained eye might easily see little to no difference between them. First of all, while bear flags occur frequently and on many timeframes, the shorter the time frame, the less reliable the signal.
- The flag pole is a pronounced downward price movement, while the flag is a period of sideways price action.
- When the market then starts to consolidate to create the counter-trend flag portion of the pattern, transaction volume should slacken off considerably as the flag forms.
- The potential sell signals generated by the bear flag are straightforward.
- When a bear flag pattern fails, the stock price fails to achieve the price target or reverses before reaching the height of the flag pole.
The textbook profit target is the height of the flag pole measured down from the top of the flag. In fact Rayner after reading evry thing u illustrate I understand and picture as if u re closer to me teaching. When the market is in a downtrend, there’s an ebb and flow to it. That’s why the range of the candles is large as the sellers could easily push the price lower.
So, there you go – if you understand bearish flags, you also understand bullish flags. There are no major differences between the two, apart from the fact that bull flags lead to a 1% greater price moves on average when compared to their bearish counterparts. Research from industry expert Tom Bulkowski suggests that bear flags lead to an average price decline of 8%. With that in mind, calculating both profit targets and stop losses that combine for a favorable risk-reward ratio shouldn’t prove to be too challenging an equation. A flag pattern can be either be identified as a bear flag or a bull flag, depending on the direction of the prevailing trend.
Traders should remember that there is a 55 percent false signal risk. Two trading platforms currently offer pattern scanning and screening, TrendSpider, and FinViz. Finviz is a good free pattern scanner, whereas TrendSpider enables full backtesting, scanning, and strategy testing for chart patterns.