How to Use Bullish flag pattern in day trading
How do you identify a good place to enter a trade? This is a common question that new traders ask.
As we have written before, there are many answers to this question.
For example, there are those traders who focus on fundamental analysis and others who use technical analysis. There are also those traders who use price action.
In this report, we will look at a price action that is known as a bull flag that traders use to identify points to enter trade. We will look at what a bullish flag is, its difference with bearish flag, and its examples.
What is a bullish flag?
At times, the price of an asset will move sharply upwards. This could be because of a major news event like better earnings forecast or a rate hike by the Federal Reserve.
It could also be because of a sudden entry of bulls.
In most cases, when this happens, the price does rise infinitely. It rises and hits a break at a certain point as bulls take profit and as some bears start coming in.
When this happens, a pattern known as a bullish flag is usually formed. In other cases, a pattern identified as a bullish pennant can happen.
What is a bullish flag? A bullish flag is preceded by a sharp rise in the price of an asset and then followed by a simultaneous channel with a number of parallel resistance and support levels.
And this is usually relatively short. The image below shows the ideal parts of a bullish flag pattern.
The 3 Key Features
As you can see, the bull flag pattern has three key features. First, it is formed after the price of an asset jumps. This is the flag pole of this flag.
Second, it has a consolidation phase, as bulls and bears battle it out. In most cases, this usually happens during a period of low volume.
Most importantly, you need to ensure that the retracement does not go deeper than 50%. If this happens, it could be a sign thar a new trend is coming up.
Finally, there is a bullish breakout. As a result of this, the bullish flag pattern is known as a bullish continuation pattern.
Bull Flag vs Bullish Pennant
The only difference between a bull flag and a bullish pennant is that the latter usually forms a triangle pattern instead of a series of support and resistance patterns.
Practical Example
The chart below shows the daily chart of Apple (AAPL). As you can see, the stock was on a strong bull run, when it made a major gap on 31st July 2018.
Whenever a strong gap happen, many bullish investors are known to exit their trades on profit-taking. Some bears also go in, hoping that the price will decline.
When this happens, a bull flag pattern is formed.
Bullish flag strategies
As such, the best strategy is usually to buy the stock when it moves past the upper side of the channel.
This is contrary to what many strategists argue. Buying at the lower end means that you are risking your trade in case a new bearish trend form.
Instead, buying at the upper side means that bulls are usually in control.
What about a bearish flag?
A bearish flag is the exact opposite of a bullish flag. It usually happens when the price declines sharply and then form some consolidation. It then breaks out downwards as shown in the chart below.
› Bear Market: Definition and 5 Tips to Trade It
Final thoughts
Bullish and bearish flags are important continuation patterns you can use in the market today. They are easy to identify and often accurate.
Still, we recommend that you spend a lot of time learning them before you try them with actual funds.
External Useful Resources
- Are You Taking Advantage of These 3 Bull Flag Patterns? – TimotySykes
- Bullish Flag Formation – Hitandruncandlesticks
