What Is a Bull Flag Chart Pattern? | Tips to Define It
Intro
How to trade with profit? One of the answers is to know a trader’s ABCs. It involves charts, figures, and patterns, as well. That’s a well-known fact that traders use chart patterns to explore stock price trends when looking for trading opportunities. Some patterns signal traders they should buy, while others warn them when to sell or hold. Today we will deep dive into bull flag patterns and ways to recognize them.
What Is a Bull Flag Pattern?
Let’s start with some visualizing — a bull flag pattern looks like a parallelogram-shaped flag with masts on both sides and shows a trend consolidation. It happens when prices swing within a small range before and after drastic jumps or falls.
In changeable cryptocurrency market conditions, traders tend to use crypto trading strategies such as swing trading and a bull flag pattern for trading during a strong trending market or after a breakout.
The bull flag pattern’s first aim is to signal you to profit from the market’s current situation. Thus, crypto traders can use the data it offers to find entry points with low risk in relation to potential benefits.
How long can a bull flag last? A bullish flag pattern is a short-term trend that approximately lasts from one to six weeks. So, what happens afterward? If a bull flag pattern is correctly identified, it indicates the prolongation of a bull trend that already exists, and the price will grow after the pattern is finished.
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Main Bull Flag’s Characteristics
The bull flag pattern looks like a flag on a pole when it’s displayed on a chart, and as long as it represents an uprising, it is a bullish flag. In both traditional and crypto trading, a bull flag pattern has three essential features:
- The cryptocurrency has shaped the pole after a strong rise in relative volume;
- At lower volumes, the cryptocurrency is concentrated near the top of the pole to make the flag;
- To support the trend, the cryptocurrency outbreaks from the consolidation pattern at a relatively solid volume.
Step 1:
Spot directional movement to the upside. Typically, this momentum can be framed under consecutive bars to the upside, with very few retracement bars.
Step 2:
Stand by for corrective action. Usually, this correction can be framed under a downtrend channel, where a structure like a lower low is presented.
Step 3:
Find the breakout level to enter the order. More details about the trading execution are presented in the next section.
Bull Flag vs Flat Top Breakout
Both patterns can signal bullish continuation, but the key difference is that the bull flag has lower highs, while the flat top breakout has the same highs.
How to Trade a Bull Flag Pattern?
When a bull flag pattern happens, crypto traders put the entry where the structure that frames the flag fails to keep its downward momentum after the bullish pattern has been defined.
The volume indicator helps traders verify the bull flag signal following the price of a chosen cryptocurrency until the price breaks over the resistance of the flag. After that, on the price chart, by using the volume indicator, crypto traders try to predict that trading volume will decrease during the price correction.
The trend continues if trade volumes increase going along with the pullback and the price crosses the bull flag’s upper threshold.
That’s important to mention, that the bull flag’s support line is supposed to be below the stop-Loss order, and traders use the risk/reward ratio to define the take-profit threshold. Is a bull flag pattern any reliable?
Although the bull flag pattern shows a continuation pattern, the trader’s risk-return profile outlines the success of any crypto trading strategy. Additionally, reward or loss depends on investors’ investment aims and if one recognizes the bull flag patterns signals, such as jumping up cryptocurrency prices on high relative volume or if prices demonstrate a confident pullback pattern as they consolidate at or near highs.
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Breakout Phases
There are three main stages (or phases) of a breakout:
1. Consolidation: flag price structure should be clear-cut within two down-sloping parallel trend lines.
2. A breakout itself: happens when the price runs through the upper resistance line. The breakout should be accompanied by heavy volume.
3. Confirmation: a breakout is confirmed by the price closing above the upper resistance line, along with sustained follow-through buying above the flag.
The consolidation tends to display clear support and resistance levels. It shows symmetry between the supply and demand forces, and sometimes it’s a sign of the calm before the storm.
As the conquering trend is upward, there’s a high probability of trend continuation and an upward breakout. Investors who have accumulated and bought cryptocurrency during the initial rally keep holding. Then, during the consolidation phase, investors who missed the initial drive-up will try to grasp the moment and get the cryptocurrency as well.
As a matter of fact, the higher buying interest will be a reason for an imbalance between supply and demand forces and drive the price higher.
In conclusion, it’s crucial to understand that a vast majority of trends are the breakout’s result.
A Bull Flag Pattern: Pros and Cons
A bull flag abdication provides a transparent price level at which traders can plan a long trade. Moreover, it gives the clue when to put the stop-loss order, issuing the necessary support for successful trade management. Besides, the signals to identify bullish pattern trends and the procedure to spot them involve easy-to-follow steps.
In spite of the above-mentioned advantages, it’s rather difficult to say that a bull flag pattern eliminates all the risks and is a golden mine trading strategy. As long as money is involved, the risk of loss appears. One of the most serious risks associated with trading cryptocurrencies is the possibility of price volatility and market swings. Consequently, investors should always consider the risks-returns of a particular investment to avoid experiencing negative results executing bullish or bearish patterns.
Risks
Misinterpretation of the market context is highly possible. The context could be not framed under a trending environment but, rather, a sideways market.
You should have knowledge to get used to its action.
Benefits
The flag’s breakout provides a transparent price level to enter a long trade.
The pattern provides asymmetrical risk-to-reward scenarios in which the potential profit is typically larger than the risk.
The steps to identify the pattern are easy to follow.
Bull Flag vs Bear Flag
The critical difference between a bullish and a bearish flag is the price direction movement. With the bullish flag, the goal is to participate in a strong uptrend. As for the bearish flag pattern, the main idea is to trade short in the direction of the winning downtrend.
Cryptocurrency allows the opportunity to find bullish and bearish flags. The main reason is that it’s a market with high volatility, where options to trade long or short are presented almost daily, depending on the execution time frame.
The Bottom Line
The bull flag pattern is widely used by traders as it signals the presence of a strong uptrend. This pattern helps traders who missed the initial surge of a cryptocurrency’s upward movement to profit.
In spite of that, it is vital to use it with other analysis techniques and to observe the whole market context before making any trade moves. Managing risks and maintaining proper position sizing to ensure the success of any trading strategy is an absolute must.
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