If you can identify key levels on a chart where shorts could be underwater, then see a bull flag form, it could be indicative of a coming squeeze. We discuss this strategy in detail in our post on liquidity traps. For example, the best bull flags occur at the start of a new uptrend. So, the earlier you are in a bull run or momentum swing, the better your bull flag should perform.

More specific disadvantage to the bull flag is that even if your trade does eventually work out in your favor, it might take a long time to come to fruition. Identifying the bull flag pattern doesn’t have to be complicated. Volume may increase first and then decrease as the formation reaches the endpoint. There may be an uptick in volume during the breakout, although it may be minimal. The trend ends with the price moving in the same direction as the breakout. Once we see the first large candle and the stock rise again, we can buy under $1.40, placing our stop loss below $1.30.

  • In a downtrend a bear flag will highlight a slow consolidation higher after an aggressive move lower.
  • The shape of the flag is not as important as the underlying psychology behind the pattern.
  • This resumption should be accompanied by the presence of renewed volume (demand).

Many traders are convinced their trade has to work — they don’t include an exit in their trading plan. Sometimes a bull flag won’t work out as you want or expect. It’s similar … but the top and bottom trend lines meet at a point.

A bearish flag formation

A bull flag is a chart pattern that occurs when the price of a stock or other asset consolidates in a tight range after a strong upward move, forming a flag-like shape on the chart. The pattern is called a „bull“ flag because it is often seen as a bullish indicator, suggesting that the asset’s price is likely to continue to rise. The below chart highlights an upside breakout from a bull flag pattern, which is accompanied by a high-volume bar. The high volume confirms the breakout and suggests a greater validity and sustainability to the move higher. In a bull flag formation, traders will hope to see high or increasing volume into the flagpole (trend which precedes the flag).

  • The patterns also follow the same volume and breakout patterns.
  • So, the earlier you are in a bull run or momentum swing, the better your bull flag should perform.
  • Finally, the buying pressure is so strong that the price breaks upwards, and an explosive rally averaging +39% ensues.
  • Smart traders know key patterns — and the bull flag pattern can be a crucial momentum indicator.

It’s common for the flag to trend downward — against the trend — before the next upward push. The flag that forms during the consolidation period can look like a rectangle or a triangle (a pennant flag). If you’ve been following me for any length of time, you know I love to trade based on patterns. Join thousands of traders who choose a mobile-first broker for trading the markets. Finally, I suggest using a tight trailing stop loss such as the 20-period moving average. It means that you need to identify range markets and spot where their support and resistance are.

Bullish Flag Emergence

Imagine the bull flag as a map to hidden gold, with the initial pole marking the X that signifies the trend’s projected continuation. Timing an entry is like pinpointing where to dig; jump in prematurely, and you might be duped by a mirage, too hesitant, and you may find the prize has slipped away. The sweet spot often lies just as the price edges past the flag’s upper limit, signaling the market’s nod to advance the trend. This leap should be reinforced by a swell in volume, a silent partner confirming the trail is set. The flag follows, reminiscent of an interlude in a theatrical performance, where the rapid appreciation in price eases into a calmer period of sideways or moderate downward movement. The prior exultant rally quiets to a murmur of anticipation.

These global stocks are forming the bullish ‘golden cross’ signal — and have risen every time in the past

Generally speaking, a bull flag pattern is very reliable depending on the context of the stock you are trading. The later the run and the more consolidations you have, the less likely a bull flag is to perform well. A bull flag also indicates that demand is stronger than supply. The „flag pole,“ or initial uptrend, should be strong in demand. Once early bears realize the strength in the overall move, they give up their early shorting efforts.

Here are three bull flag patterns I think you can use to your advantage. Keep in mind this back and forth goes on for a while — hence the consolidation. Also be aware the trading volume tends to drop during the flag or consolidation period as traders buy and sell within a small price range. It’s not an exact science, but it’s about as close to predictable as the stock market gets.

Psychology of Bull Flag Formation

The top of the flag was clearly defined near the $15 area and CMN was able to close above that level. While CMN could enter another parabolic rise, often a stock will come back to test the breakout area bullish flags a few sessions later, offering a second entry. The patterns also follow the same volume and breakout patterns. The patterns are characterized by diminishing trade volume after an initial increase.

If lines converge, the patterns are referred to as a wedge or pennant pattern. These patterns are among the most reliable continuation patterns that traders use because they generate a setup for entering an existing trend that is ready to continue. These formations are all similar and tend to show up in similar situations in an existing trend. A high-tight flag is a bullish pattern where buyers bid up the stock in a vertical direction, even at high levels.

Once the pole is found, identify the range of consolidation or wavering in the price of the stock (this is the flag). Prices will likely fluctuate during this stage before they begin trending upwards, assuming the bull flag does what is expected. This is because the consolidation creates a resistance line at the higher end, while the lower end is the support line. When the stock price rises above the resistance level and continues in an upward trend, the pattern has been established.

What a Bull Flag Pattern Is

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The emergence of a Bullish Flag often follows a period of intense buying activity that forms the flagpole. Then, the market enters a consolidation phase forming the flag. It’s crucial to monitor volume during this pattern, as it can provide extra confirmation of the pattern’s validity. Then the trader repays the shares by purchasing at a lower price. But when the stock goes up, like in the bull flagpole, the squeezed short seller purchases shares at a higher price to cut their losses.