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Trade Ideas: Bull Flag Pattern

There are times when you wait for a market pullback, yet it does not occur, and the market moves higher unexpected. Now, how will you deal with this type of scenario? In this advanced trader educational post, we will teach you a strategy that will help you fix a worst-case scenario in the said situation – bull flag trade pattern.

What is a Bull Flag pattern?

Bull Flag trade pattern is a continual chart pattern which is a signal that the market is likely to move higher. Take note of the following and know how to spot the said pattern:

  1. If there is a strong trend moving higher, the range of the candles is to become bullish than the usual and are tend to close near the highs.
  2. Upon a strong trend going higher, the market will need a break. But expect for a potential bull flag pattern, and the market will have a pullback.
  3. The pullback might consist of smaller range candles as compared to earlier movements. The closer the range, the greater the possibility will breakout higher.

See the sample chart below to know how bull flag looks like:

Bull Flag Pattern Sample - Finance BrokerageWhat is a Bear Flag pattern?

A Bear Flag is just the opposite of a Bull Flag pattern. Also, a continual pattern, but gives a signal that the market is likely to move lower. Take note of the following and know how to identify one:

  1. When there is a strong trend moving lower, the range of the candles is bearish than usual and tend to get near the lows.
  2. Upon a strong trend going lower, the market will need a break. But expect a potential Bear Flag pattern, and the market will have a pullback.
  3. The pullback might consist of a smaller range of candles as compared to earlier movements. The closer the range, the greater the possibility will breakout lower.

See the sample chart below to know how bear flag looks like:

Bear Flag Pattern Sample - Finance BrokerageYou might think now that the flag pattern is just a pullback in an existing trend. Well, your right but the kind of price movement that shows the pullback is what separates the flag pattern from the normal pullback. What you’re thinking was a shallow pullback consist smaller range candles. Meaning, if you ever saw a steep pullback with big range candles, it might not be the one we’re talking about today (bull flag). Look at the sample chart below to further understand.

Ranged Candles & Steep Pullbacks - Finance BrokerageTrade ideas and strategy with a Bull Flag Pattern

We should now observe for a first pullback in order to identify a potential bull flag pattern. What’s the first pullback? The term “first pullback” came from a simple market breaks out of range in which pullback occurs for the first time. Whenever the market is in a range, it will soon break out. The longer it occurs, the harder it will break.

When the market then breaks out, traders missing the move might not wait to enter in the first sign of a pullback. The pullback might have a shallow retracement because not a lot of traders like to trade in against to a strong momentum. That now offers a high probability for a pullback trade. Look at the sample chart below to further understand.

Pullback after Breakout - Finance BrokerageNow how to find these high probability pullback trades? These are quite simple, take note of the following step process now:

  1. Look for or identify a range market
  2. Let the market records to breakout.
  3. Now, wait for a bull flag pattern to occur.
  4. Go for a long trade when the trade breaks the highs

Trading with a Bull Flag pattern continuation

Within a strong trending market, it is easier to buy breakouts and then wait for a pullback, yet that rarely occurs. How will you deal with that?

  1. Watch out for a strong trend market
  2. Wait for a Bull flag pattern to occur
  3. Go long upon the break of the highs

See sample chart below for further understanding.

Bull Flag Pattern in a strong trending market - Finance BrokerageBreakout – Trading with a bull flag pattern

Usually, you can expect the formation of a Flag pattern after a breakout or during a strong trend. But there are times that a bull flag pattern might occur whenever the market is in range, within Resistance. These occur due to lackness of sellers, or the buyers are only willing to buy within the resistance. No matter what, the scenario is a sign of strength and the market might breakout higher. Take note of the following and know how to deal with these scenarios:

  1. Look for a range market
  2. Wait for the Flag Pattern formation within the resistance
  3. Trade upon the break of the highs

Look at the sample chart below to understand further.

Potential Bull Flag Pattern in front - Finance BrokerageSetting your entry, stop, and exit in a bull flag pattern

Now you have an idea what bull flag pattern is and how to trade it, we’ll turn towards knowing how to look for your entry, stop, and exit.

Let’s first focus on looking for a good entry.

You can enter trade within the break of highs, or you could also wait for the market to close over the highs.  Now, which of those works better? Actually, there is none, but be cautious and keep in mind that if you enter on a break of highs, it might bring you to a false breakout, but if it’s the right breakout, it will be the best price you’ll get.

For additional decision making thoughts, if you’ll wait for a close over the highs, it could reduce your chance of a false breakout. But when that breakout turns to be a strong one, you’ll end up entering a much higher price. In conclusion, whichever of the two approaches you’ll use, stay consistent and responsible with it.

Now let’s turn to learn how to set a good stop loss.

Best advice here is don’t set a stop loss at obvious levels such as support & resistance and swing high & lows. Look at previous trades, observe how often you decided to make a stop then discovering that the market soon has a complete reversal.

How would you deal with that kind of situation? Set your stops at a distance far from market structure. That simple principle is applied even in a bull flag pattern. Take note of the following and know better:

  1. Know what’s the swing low of a bull flag pattern
  2. Set stop-loss 1 ATR under the low
  3. Apply the opposite action for a Bear Flag Pattern

Lastly, let’s turn to learn how to exit in a bull flag pattern.

There are various ways to exit your winning trade in a bull flag pattern. But it is best to track your stop loss and wait for the market to take you out of the trade. Bull flag pattern appears mostly in a strong trending market (or after it breaks off a range). Such market situations would be best if you choose to ride it to track your stop loss. You can use a 50-period moving average (MA) to track your stop loss and then exit trade of the market gets closer to it.

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