Bull and bear flag patterns are popular technical indicators used by traders to identify trend continuations. This article will be all about identifying these patterns and trade using them.

What is a flag pattern?

A flag pattern helps us identify a trend continuation. The pattern is named because it resembles a flag on a flagpole. The flagpole represents a strong movement in both prices and volume. It is followed by a slow or pullback, represented by the flag part of the pattern. Depending on the direction of prices, flag patterns can be bullish and bearish.

How to identify a bullish flag pattern?

We can identify the bullish flag pattern in an uptrend when an aggressive high price movement is followed by a slow downward or parallel trend of prices. Here, the net trade volume remains positive.

 This shows there is higher enthusiasm for buying the stock than selling it. Traders who trade using this pattern use the flag as a breakout point or resistance level and enter a trade when it passes this level. Traders love this pattern as it is both easy to identify and gives a correct indication of market sentiments.

How to identify Bearish flag pattern?

The bearish flag pattern is just the opposite of the bull flag pattern. We can identify a bearish flag pattern in a downtrend when an aggressive downward price movement is followed by a slow upward or parallel direction of prices. Here, the net trade volume remains negative.

This shows there is higher enthusiasm for selling the stock. Traders use the flag as a breakout point or support level to find short entry into the market.

Trade using flag pattern

Trading using the flag pattern requires patience for the flag and flagpole to form. Then they plot the upper and lower trend lines. Traders also use the stochastic oscillator to help determine the time of entry and exit. We can use other ways while trading with bear and bull flag patterns.

·         High volume

Traders using the flag pattern see a high volume movement after the appearance of a flag as a definite indicator of the continuation of that particular trend. A high volume confirms the breakout and suggests greater sustainability for the movement of the prices.

·         Two Trade Entry Spots

A flag pattern gives two points of entry. The first entry is at the flag break, and the second entry is at the end of the flagpole. Identifying the first entry point allows traders to capitalize on the movement of the prices and improve their profits.

·         Stop Loss Positions

We all know the importance of a stop loss in a trade. It helps us during sudden price changes by initiating selling our positions. So, even if we are trading using the flag patterns, we should keep in mind to place our stop loss, which will limit our losses if the stock loses its momentum.

We can place the initial stop loss under the upper trend line on uptrends and the lower trend line on the downtrends. Yes, this will give low room to your price movements and even trigger the stop loss at downward movements. That is why some traders prefer to place the stop loss at the lower trend line on uptrends and lower trend lines on downtrends.

·         Price levels

We can even trade using price levels. To do this, we need to use other indicators while entering a flag pattern, for example, during the occurrence of a bear flag pattern when the price exceeds that of the flag level. We can use the Bollinger Bands and fib price levels.

Here, getting the fib price level is easy. Just plot the high to low and low back to the high price of the flagpole. It will give you the potential price levels.

Conclusion

We can never be sure if the market will continue following the trend after the appearance of indicators or patterns. But using the bear and bull pattern for trading is one of the most definite and reliable indicators of trend continuations. Even after the appearance of the same, traders should evaluate their theories using other indicators before entering a trade.