Bear flag pattern – Forex explained
The bear flag pattern is a well-known price candlestick pattern used by technical traders within the financial markets to determine trends in the financial markets. Using them, they form the trading strategies according to the results from the bear flag pattern in the chart. Here we will explore:
- Definition of a bear flag chart pattern
- How to identify a bearish trend on forex charts
- Bear flag vs bull flag
What is a bear flag pattern?
A bear flag is a technical candlestick type of pattern providing an extension to an existing downward trend. The bear flag pattern is underlined from an initial accentuated directional move down, followed by a consolidation in an upwards direction. The accentuated move down is known as the ‘flag pole.’ The consolidation is referred to as the ‘flag’ itself.
How to identify a forex bear flag pattern
Identifying a bullish or bearish flag pattern in a chart can be a challenge as it involves a series of factors and indicators. These factors and indicators can serve as both a signal for the model and a confirmation for the model. Some of these metrics can be subjective, but many traders have used them successfully and have claimed that they worked. So, what are the factors to consider when identifying a bullish or bearish flag pattern in a chart?
Before you can reach the pattern flag, you must first have the pole. The pole is actually what holds the flag – and at the other end of the pole is the flag. The flagpole is made up of a strong series of price movements – rising prices for a bull market and falling prices for a bear market. In addition, the flagpole always follows the direction of the trend.
The flagpole is drawn by connecting a line from the recent bottom and top of the trend. Additionally, many traders consider the pole to be as important as the flag. This is mainly because it is a good factor indicating how long the trend will continue. In other words, many traders assume that the length of the continuation of the trend after the breakout will be as long as the length of the pole. This could be just a theory and has yet to be proven, but it is actually a good way to reduce risk, and it offers the trader a visible exit position.
The principal component of this pattern is the flag itself as it dictates when and where the breakout or continuation of the trend will occur. Unlike the flagpole, the flag is positioned inverted. So, if the pole follows a bullish market trend, the flag will move in a bearish direction. Once the conditions are right and a breakout has been made, the trend will continue towards a bull market.
In order to be able to plot the flag, a trend channel must be confirmed during the consolidation range. This trend channel involves an upper trend line created by drawing a line from the upper highs of the consolidation range. On the other hand, the lower trendline is created by drawing a line from the lower lows of the consolidation range.
A price break from the upper trendline would mean a continuation for a bull market. Meanwhile, a price break from the lower trendline would mean a continuation for a bear market.
The fluctuations in volume can also be a great confirmation of when a flag will take place. Once the pattern forms, a considerable volume should be noticed. At the end of the pole, and when the flag begins to form, the volume should start to decrease, and consolidation should be established. The reduced volume should be a good sign that says, “something is about to happen” or “or let’s get some rest.”
Bear vs Bull flag pattern in a chart
The bear flag pattern works with a bear market. This is the opposite of the bullish flag pattern, and it is the continuation of a bear market. The bear flag consists of a pole that represents a steep drop in price. It’s followed by a short consolidation having a narrow price range, usually having higher lows. Much like the bullish flag, a successful breakout of the bearish flag pattern occurs as soon as the lower trendline is crossed. The pattern must cover at least a 12 day to 2-week time frame.
On the other hand, the bullish flag pattern is the continuation of a bull market and occurs right after a dramatic rise in price. It is among the most reliable models that signal a continuation of an uptrend.
A bull flag pattern is a momentary break in a bull market that begins with a sharp rise in price (which represents the pole) and a momentary drop in price, which represents the flag. Typically, successful bullish flag patterns erupt after day 12 through week 2. The breakout occurs when a decrease in volume is noticed and as soon as the upper trendline is crossed.
Both indicators are made of an upper and a lower trend line. The trend lines move in a parallel direction. They are formed by connecting higher highs and higher lows during consolidation.
Additionally, successful breakouts for either flag result in a price drop or increase equivalent to the flagpole length.
The bear flags are quite a powerful arsenal in the face of strong market trends. Being in a position to know how to spot these patterns on a chart allows you to execute smarter decisions during a trade. It also reduces risk and provides better assumptions and assessments for price targets, exit and entry points in a trade.
To take full advantage of these chart patterns, it’s also worth having a solid fundamental analysis of your specific market. Know your asset before you invest. By having a good fundamental analysis of your assets, you can have a better chance of spotting chart patterns. And by mastering how to spot a bullish or bearish flag on a chart, you will further improve your forecasts and assumptions in your trading.