WHAT IS A BULL FLAG?
A bull flag is a continuation pattern that occurs as a brief pause in the trend following a strong price move higher. The bull flag chart pattern looks like a downward sloping channel/ rectangle denoted by two parallel trendlines against the preceding trend.
During this period of consolidation, volume should dry up through its formation and resolve to push higher on the breakout. The actual price formation of the bull flag resembles that of a flag on a pole hence its namesake.
HOW TO IDENTIFY A BULLISH FLAG ON FOREX CHARTS
It can be complex identifying a bull flag on a chart because the pattern entails several different components. Traders will need to correctly identify and understand these components to trade this pattern successfully. Key things to look out for when trading the bull flag pattern are:
Preceding uptrend (flag pole)
Identify downward sloping consolidation ( bull flag )
If the retracement becomes deeper than 50%, it may not be a flag pattern . Ideally, the retracement ends at less than 38% of the original trend
Enter at bottom of the flag or on the breakout above the high of the upper channel boundary
Look for price to break higher with a length potentially equal to the size of the flag pole
WHAT IS A BEAR FLAG?
A bear flag is a technical pattern that provides an extension/continuation to an existing downward trend. The bear flag formation is underlined from an initial strong directional move down, followed by a consolidation channel in an upwards direction (see image below). The strong move down is known as the ‘flagpole’ whilst the consolidation is referred to as the ‘flag’ itself.
HOW TO IDENTIFY A BEARISH FLAG ON FOREX CHARTS
Identifying a bear flag can be easy once traders understand the components, and this is applicable to all financial markets, not just forex. The pattern itself is divided into three parts:
1. Traders will need to find the flag pole which will be identified as an initial decline. This decline can be steep or slowly sloping and will establish the basis for the trend.
2. The bear flag is identified as a period of consolidation after the completion of prices initial decline. During this period, prices may slowly channel upward and retrace a portion of the initial move. At this point traders will wait for price to break to lower lows in the direction of the trend.
3. After price begins to move lower again, traders can then find the final component needed for trading a bearish flag pattern. The profit target is a potential value to take profit after a currency pair’s next decline in price. This pricing level can be identified by first measuring the distance in pips of our initial decline. This value can then be subtracted from the peak resistance line formed from our consolidating flag.