The direction of the market is one of the critical things traders look out for when trading. Investors use patterns in determining price directions. These chart patterns can be utilized as strategies or to develop trading strategies. One of the many chart patterns available is the Bear Flag Pattern. In this guide, we will discuss what it is and explain how it works.
Overview: What Is a Flag?
For background, a flag pattern is a chart pattern that falls under the continuation category or group of chart patterns. A flag is a short-term continuation pattern since it only lasts for a short period in the market. Continuation patterns like this happen within a specific price movement and provide signals of a continuation of the trend to traders. A flag pattern can either be a bullish flag or a bearish flag.
What Is a Bear Flag Pattern?
The bear flag pattern is a technical pattern that occurs within a bearish trend or downtrend, followed by a pause in the trend line or the consolidation zone. The strong directional downward movement is the “flag pole” while the consolidation is the “flag.”
A bear flag signifies the continuation of the direction it followed before the consolidation. The stronger the move downwards is, the higher amount of potential profit there is.
Identifying a Bear Flag Pattern
If you understand what a bear flag pattern consists of, you can quickly identify one in the charts. You can use this knowledge in any market. Even if the pattern looks simple, you must know how to define it to take advantage of it to have a more successful trade.
For better identification, remember that this pattern has three parts:
- The flag pole will identify the initial decline or downtrend and is the basis for the trend. This can be steep or slightly sloping.
- The flag is the period or zone of consolidation after the initial decline of prices is completed. In this zone or period, the prices may slightly move upwards.
- The last part is another downtrend that follows the same direction or trend of the flag pole.
To identify a bear flag pattern manually, you can follow these steps:
- Since this pattern only occurs at a downtrend, if there is a significant sharp downward price movement, it can be a flag pole and a possible sign for a whole bear flag pattern.
- Wait and observe the price begin consolidating by a slight upward movement for a certain period or zone in the charts.
- Insert parallel lines on both the top and bottom of the part of the candlestick of the consolidation.
- Check if the figure formed resembles a flag. If it does, it’s highly possible to be a bear flag.
- If the price breaks down and continues to move downward, just like the first trend, it is a complete bear flag pattern.
Bull Flag vs. Bear Flag
Both the bull flag and bear flag represent the same chart pattern. The main difference between these two is that they are reflected in opposite directions. Generally, both patterns have the same components, except that the trend is in the upward direction in a bull flag. It’s essential to learn about a bull flag pattern separately so you can gain better insight into this pattern.
Advantages and Disadvantage of the Bear Flag Pattern
Generally, there are many benefits this flag pattern provides to traders. Traders view bear flag patterns as a reliable price pattern indicator. It’s also used for defining entry and stop levels. But like any trading tool or instrument, the bear flag pattern also has its advantages and disadvantages.
Here are the advantages:
- It can be applied to any financial market.
- It’s a helpful pattern at any time frame.
- It provides entry, stops, and limit levels.
- It assures traders that the price downtrend will continue.
- It might be complex and challenging to identify for newbie traders.
- It’s a rare pattern.
- It doesn’t work all the time.
Tips for Traders
Even if the flag pattern looks so simple, you must know how to utilize it wisely. It would be best if you were cautious when trading it. Here are some tips for traders when trading with bear flag patterns:
- Don’t enter a trade right away. Observe if the price will continue to break below the bottom line of the pattern. Until it does, the downward movement of the prices is still not confirmed.
- Look for evidence that confirms the continuation of the downward movement. Although the pattern is used, for this reason, a separate proof is beneficial. One thing you can use is the volume.
- Don’t be deceived easily. Even if the pattern looks like consolidation, the price can still spike or move slightly up. It’s best to wait for confirmations that the downtrend will continue.
To summarize everything, a bear flag pattern is a trading tool used to confirm the continuation of the downward price movement in the market. It’s easy to identify and is helpful since it alerts traders to trade in this period. It’s a reliable yet rare tool that many traders use to grow their accounts. If you’re a beginner, it might be challenging for you, so it’s best to practice first.
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Blake is a self-made online day trader with a knack for adventure. On his free time, he loves reading and learning new methods in the trading as well as improving his jiu-jitsu skills. He currently resides in New York City.