How to Trade Bullish Flag Pattern

The post How to Trade Bullish Flag Pattern by Jay and Julie Hawk appeared first on Benzinga. Visit Benzinga to get more great content like this.

Trade the bullish flag pattern with LonghornFX as your broker.

The bullish flag pattern has been used profitably by technical traders since charts were first used in 17th-century Japan. Bullish flags are just one of the various classic continuation patterns commonly used for positioning by technical traders.

In this article, Benzinga explains the bullish flag chart pattern, how it affects price action and how price-action traders can optimally trade a bull flag once confirmed.

Keep reading for more information on how to recognize and confirm a bullish flag pattern as well as the best trading strategies to use once you have identified a bull flag.

What is a Bullish Flag?

A bullish flag is a classic chart pattern that gets its name because its appearance is similar to a flag flying to the right of its flagpole. When seen on a chart, a bullish flag consists of a sharp rally followed by a pullback and consolidation phase that proceeds between parallel trend lines and that generally forms ahead of a second sharp market rally. 

A bullish flag pattern is generally considered a continuation pattern that furthers the direction of the prevailing market trend after a short pause or consolidation phase. Since trading volume generally wanes during the flag formation, it signals that the retracement of the initial move lacks conviction, so the underlying trend is more likely to continue than not. 

Because many technical traders can easily recognize the bull flag chart pattern, and it has well-defined profit objectives and a clear set of trading rules, a bull flag strategy can readily be incorporated into a technical trading plan. 

How to Identify a Bullish Flag

The first thing to remember when trying to identify a bullish flag is that every flag will be somewhat unique, so you are looking for a general pattern appearing in the market that continues an existing trend. A valid bullish flag should start with a strong rally followed by a relatively small pullback and consolidation phase as shown in the image below. 

A bull flag is shown on a candlestick chart with its target level indicated. Source: NewTraderU.

The consolidation phase of a bull flag always appears between parallel trendlines that connect the high and low points of the consolidation. This part of the pattern can either be flat and progressing sideways like a rectangle or slanting downward. 

If the consolidation of a bear flag is sideways as in the schematic diagram shown below, it can also be referred to as a flat-top breakout pattern. This type of bull flag tends to be even more bullish because it shows the market cannot retrace as much.

A schematic diagram of a flat-top bullish flag pattern with arrows showing how the breakout objective is computed. Source: Technical Analysis for Financial Markets Traders.

The above image also shows how the target of a bull flag breakout is calculated by measuring the length of the initial flagpole and projecting it upward from the flag’s breakout point. 

Because each phase of a classic bull flag pattern is accompanied by characteristic trading volume, it makes sense to plot volume under the chart when trying to identify a valid bull flag so you can see whether the volume data confirms the potential pattern. 

Both the initial rally and the breakout rally should be accompanied by a sharp rise in trading volume, while the intervening consolidation phase or flag should display waning volume. 

How to Trade a Bullish Flag

Technical traders observing a bullish flag pattern forming typically watch the market closely for a breakout of the upper trendline of the flag portion of the pattern. Once that trendline breaks, they look to take a long position. 

Longs can be established at the market after the breakout, although some traders prefer to wait for a pullback to give them a better entry point, as long as the market does not retrace sufficiently to break back below the level of the bull flag pattern’s upper trendline. 

The bullish flag pattern is reliable, but it can sometimes fail like other classic chart patterns. Accordingly, some prudent traders will wait for one or two subsequent time periods to pass to make sure the breakout persists before taking a long position on a breakout. 

Many traders like to use trading volume to provide a confirming signal for flag patterns. They often seek to confirm the earlier phases of the bull flag pattern by looking for an initial spike as the flagpole is formed. 

That spike should ideally be followed by waning volume occurring during the consolidation phase that forms the flag portion of the pattern. A second spike in trading volume should occur after the breakout as the pattern completes. 

Risks of Trading the Bullish Flag

As with any classic chart pattern, bullish flags are not always effective indicators of the market direction. This can present a risk to any trader relying on this pattern as part of their trading strategy. 

The possible fallibility of bull flags also means you should generally confirm the direction of the underlying trend and review volume data to make sure it is favorable before you trade after observing a bull flag’s upside breakout.

Another risk involved in trading a bull flag pattern is that unexpected financial news events can cause sudden and even discontinuous market movements as the new information is discounted quickly by market makers. This news risk can send the market moving sharply in the opposite direction from what was expected and cause the failure of a bullish flag’s breakout signal. 

Tips for Successful Trading of Bullish Flag Pattern

Most people do not find trading a bull flag complicated, but it is worth keeping the tips explained below in mind to increase your chances of doing so successfully. 

Risk Management

Most technical traders observing a bull flag pattern will put their stop-loss order in a protected place just under the upper resistance trendline of the flag that the market recently broke above. This prudent practice helps limit your losses in case the expected follow-on rally signaled by the bull flag breakout does not occur. 

You will want to keep your chosen risk-reward ratio in mind when selecting where to put your trade exit orders. When it comes to taking profits on a long position established based on a bullish flag pattern, however, two traditional options exist. 

1. First take-profit level: Determining the first take-profit point requires you to take the difference between the upper and lower trend lines of the flag pattern. This amount is projected upward from the flag’s breakout point to get the initial pattern objective.
2. Second take-profit level: The second take-profit point is computed by measuring the length of the sharp flagpole rally that initiated the bullish flag pattern. You then project that amount upward from the bull flag’s breakout point to get the second pattern objective. 

As part of your trading strategy, you can plan on taking full profits at either level or a portion of your profits at each level. Remember that solely using the second take-profit point will increase your potential reward, but it will also increase your risk of not getting filled in case the market fails to reach the higher take-profit level. 

Another way to trade this would be to move both your stop-loss and take-profit order levels upward once the market moves up past the first take-profit point. The orders will eventually be filled on a substantial market retracement downward. 

Patience and Discipline

All traders considering using a bullish flag pattern strategy should understand the importance of patience and discipline. Stay calm and avoid the temptation to trade ahead of the pattern breakout just because you think you might miss out on part of the upcoming big move.  

Instead of jumping the gun, you should wait patiently for the clear trade entry signal this bullish pattern provides when an upside breakout occurs on a significant spike in trading volume. Once you see that signal arise, it is time to establish a long position. 

After entering a trade based on a bullish flag pattern, stick to the well-established discipline of putting your sell stop safely below the breakout point. In addition, your take-profit order should be placed at either the width of the flag or the length of the flagpole projected upward from the breakout point. 

Continuous Learning

Forex traders should continuously learn to improve their trading strategies, even when it comes to trading classic chart patterns.  While you may think you have mastered the bullish flag after you practice trading it a few times, further refinement of your bull flag trading strategy may make sense to include confirmation signals like trading volume and other technical indicators. 

Should You Use the Bullish Flag Pattern When Trading?

If you happen to be a technical trader who can watch a market closely to observe classic chart patterns as they arise and trade them in a disciplined manner, using the bullish flag pattern as a trading signal is worth considering. 

Over the years, the bull flag has acquired a strong reputation among financial markets traders for providing generally reliable trading signals, so using this pattern as part of your overall technical trading strategy seems worthwhile. 

Before doing that, educate yourself on the details of how to manage your risk when using this pattern as well as how to confirm valid bull flag patterns. Practicing trading a bull flag strategy in a demo account is a prudent step you can take to get more experience trading this classic chart pattern. 

Frequently Asked Questions

Disclosure: Benzinga was commissioned for this article and is not affiliated with LonghornFX. Any comments or opinions provided herein are Benzinga’s. LonghornFX does not endorse or promote any trading strategies that may be discussed or promoted herein. The broker makes no representation or warranty as to the article’s adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.

This presentation discusses technical analysis, other approaches, including fundamental analysis, may offer very different views. The examples provided are for illustrative purposes only and are not intended to be reflective of the results you can expect to achieve. This article is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. Investing involves risk regardless of the strategy selected and past performance does not indicate or guarantee future results. Trading leveraged products such as Forex and Cryptos may not be suitable for all investors as they carry a degree of risk to your capital.

The post How to Trade Bullish Flag Pattern by Jay and Julie Hawk appeared first on Benzinga. Visit Benzinga to get more great content like this.