You’ll find that the best traders are the ones that stick to their trading psychology consistently. Whilst it is good to be flexible, there usually needs to be one or two strategies that you’re more inclined to use. This allows your trading method to remain consistent. Today we’ll look at how to trade two different types of patterns that commonly form on trading charts – bear flags and bull flags. They are also known as chart pattern flags. Today, we will explore the correlation and differences between a bear flag vs bull flag.
These flags aren’t just unique to one type of trading, like stock trading. Although you can find stock bull flags and other types of stock flags, you can also find them in all different types of markets. We will dive into different types of flag patterns today and explain them to you. This includes the reverse flag pattern and the inverted flag pattern.
What Is A Flag Pattern?
Firstly, we will start with the basics and explain a flag pattern. The term flag pattern isn’t some complex analytical definition, though. It is named after the shape of a flag on a flagpole. A “flag” pattern is when a financial asset erupts in price and bursts upwards in a positive direction. This causes a vertical pole shape in the graph. The asset will then settle and level horizontally, creating the rest of the flag shape. When it comes to the bear flag vs bull flag, it is important to identify the pattern. Once you understand the pattern, you understand both types of flags.
When the price breaks out from its current trend price, this kick starts the beginning of a new trend. The difference between a flag from a standard breakout is when the pole shape forms and essentially takes off like a rocket, representing almost a vertical and parabolic initial price move. Flag patterns don’t have to form upwards, though. On bad days they can move just as quickly in the opposite direction. However, bear and bull flags have more in common from a chart study perspective than some might think. We will dive into both below and explain why.
So When It Comes To Bull Flags And Bear Flags, How Do I Identify Them?
There are six main characteristics when assessing a bull vs bear flag from an analytical perspective:
1. The flag pattern. This is when the asset retraces after a significant price increase. For it to remain a flag shape, the price should not settle any lower than half of the initial flagpole.
2. Flagpole: This is measured from the beginning of the upward price action and stops at the flag’s peak. The important thing to remember is that when it comes to a bullish flag vs a bearish flag, an upwards trend is called a bull flag and a downward trend is a bearish flag. We will explain both in more detail later on in the article.
3. Breakout Point: This is the precise stage on the chart where the stock or asset in question moves about the resistance level. It is a crucial part of any chart to identify correctly, as traders usually implement it to enter the market.
4. Price Projection: The predicted positive trend in price and the price the asset will settle on once the breakout point has been achieved. Again, much like the breakout point. The price projection is an important tool for experienced traders. They will use it to mitigate risk and assess what strategy they will trade with next.
5. Resistance Level: This is the price an appreciating asset will hit as its price ceiling. If the asset has exploded upwards, it will usually head to unchartered territory. A resistance level can sometimes be a previous all-time high, as a correction will usually be due.
6. Support Level: A support level is when an asset has presented a bear flag pattern and bottoms out. However, many traders will try to identify the support level and use it as a buying opportunity when the price rebounds to a more natural price.
What Does A Bull Flag Look Like?
A bull flag would usually look something like this. When it comes to a bull flag pattern vs bear flag, it is crucial to identify a solid entry point for your trade, as pictured below.
What Does A Bear Flag Look Like?
A bear flag chart would usually take this sort of shape and indicates a downward trend in the price of the asset. As you can see, a bull and bear flag pattern will mirror each other on the chart, moving in opposite directions. A recent example would be the GBP dropping heavily against the US Dollar price in September this year. However, they have much more in common from an analytical perspective than some people think.
Are Bull And Bear Flags Hard To Identify As A Beginner?
Yes and no, whilst it is true that more experienced traders will find it much easier to identify these trends, as long as you read up on it yourself, it’ll become easier to identify them with the more charts you study. For example, suppose you are trading stocks. In that case, you want to easily identify bull flag stock and bear flag stock so you can seize the opportunity. Bear flag vs bull flag are unique trading methods. However, it’s a similar set of tools for wildly different pieces of price action.
If you identify them, you don’t need to continuously check the charts to buy and sell when they hit their respective prices. You can use automated trading software, which many professionals do. This software automatically buys and sells your asset when it achieves its price goal. We have a further in-depth guide if you’d like to find out more information about algorithmic forex trading. You can also find information regarding forex trading or cryptocurrency as a beginner.
By setting up take profit and stop loss limits, you are able to remove emotions from trading and execute your trades at your chosen price. Of course, as long as there’s available liquidity at that particular point.
Bull Flag vs Bear Flag: How To Trade Flag Patterns?
When it comes to a bearish flag vs bullish flag, they share similarities despite being polar opposite shapes on the chart. It doesn’t matter what flag it is. The most integral part of the trade is the point on the chart where you execute it. Most experienced traders would say it’s a better idea to wait for a candle to come to cease so you don’t run the risk of being caught in a false signal. The candle must close past the breakout point as well. As a rule of thumb, professional traders will execute a flag pattern trade at least 24 hours after the asset has broken past the trendline. That’s why when examining a bear flag vs bull flag, you should also identify the risks. This is to ensure that you’re not putting your capital at unnecessary risk.
Some traders who trade with more risk, such as day traders who employ swing or scalping methods, may enter the market a few hours or so after the trendline is broken. They may get caught in a false signal and lose money. However, if they have caught the entry at the right time, they stand to make more significant gains than those traders who wait for price solidification.
This isn’t a guarantee, it is vital to note that you shouldn’t just enter a trade for one sole reason. It is not a guaranteed way of turning a profit. It is a strong market indicator. However, there are also a variety of other mitigating factors that can cause the market to go up and down. Therefore, you must always be cautious in your approach.
How to Trade a Bull Flag Pattern?
When compared with other types of flagging charts and chart movements as a whole, bull flag patterns are easier to spot and implement as a strategy than other trading tools. Both bull and bear flag patterns can be easy to spot if you know what you’re looking for.
However, when it comes to a bull flag pattern, you must identify two points on the chart before deciding to enter the trade. Both are solid exit strategies that you’ll find plenty of experienced traders implementing too. As a beginner, you must note these and include them in any bull flag pattern you look to trade. This applies to all types of assets, whether it is a bull flag stock, commodity, or cryptocurrency.
- The first strategy to use is a target price to sell your asset. If there is a bull signal, this is your profit goal. The amount itself depends on each trade. If you assess where the market is heading, the market sentiment and any other news that could indicate how far the price may rise, use these to your advantage and set a sensible target. Many people set a target and then move it when their emotion begins to get the better of them. They think the price will continue to rise astronomically, and once the correction hits, they end up back under their initial target price. This is also a strategy that Warren Buffet highly recommends.
- The second strategy, but an equally important one, is to set yourself a stop loss. If you have incorrectly timed the bull flag and the price starts to correct sharply, you don’t stand to lose too much money. These two strategies essentially set a suitable price ceiling and a solid safety net so that you don’t trade wildly and lose more money. It is good practice to employ both of these strategies in every trade. So whether it is a bear flag vs bull flag, the strategy still works.
How To Trade a Bear Flag Pattern?
Bear flag patterns work the same way as bull flag patterns, just in reverse. By ensuring you set a reasonable stop loss and a suitable profit goal, you already have the right mentality. This can increase your chances of making a steady profit. A calm, reasoned approach is always the order of the day when trading. The market can be emotional and volatile, so it requires a steady set of hands.
If you want to trade a bear flag stock, you can use the same tools for a bull flag stock. As discussed in this article, bear flag vs bull flag arguments can be made, but both strategies require similar techniques. Bull/bear flags rely on explosive price action to form the shapes for traders to enter ideal price ranges.
A calm and measured approach to any trade is key. If you want to ensure any trade you enter has the best chance of success. The key thing to watch out for with bear flag stocks is to enter the market within a 10/15% range of the lowest price before it rebounds. Obviously, there’s no real way to measure this, and you must do your research before executing this trade.
You don’t want the flag to continue breaking down. It could potentially enter a double flag pattern, and you start losing even more money. This is why ensuring a stop-loss is set up is so important. In this eventuality, your losses would be managed more efficiently.
Even if you become an expert at reading flag patterns, even if it is both bull and bear flags, there are times when the trade will be unsuccessful. That isn’t to say these strategies we have discussed today are wasteful; far from it. There is no damage you can cause by mitigating risk properly with genuine strategies and having the ability to identify bear flag patterns correctly. If you’re trading by identifying bull flag, bear flag or any other flag, managing risk is the ideal strategy to use as a starting point.
Even when a flag pattern forms for all to see, this does not mean it will follow the predicted trajectory. Whilst this can apply to all markets, some markets are far more susceptible to wild price swings. This includes emerging stock markets and other emerging markets, such as the cryptocurrency market. It is not uncommon to see some cryptocurrencies fluctuate within the 15-20% range within a 24-hour period. When a market of this level of volatility starts to move like this, bear/bull flags will appear in quite a quick fashion but can disappear just as quickly.
Bear flag vs bull flag are two of the most popular forms of technical analysis you can use to benefit your trading strategy. Not only have they proven to be effective for traders in the past, but they are easy to learn how to spot and can help you enter and exit a trade more safely, effectively, and efficiently. Any other technical analysis you undertake is best over a mid to long-term period as opposed to short-term strategies, which vary and carry more risk. If you’re looking to start your trading journey, these two types of chart analysis are effective tools to start you on your way.