Bear flag patterns are one of the most popular bearish patterns. They consist of either a large bearish candlestick or several smaller bearish candlesticks down forming the flag pole, followed by several smaller bullish candlesticks pulling back up for consolidation, which forms the flag. Look for price to fail below the flag to confirm bearish breakdown.
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What Are Bear Flag Patterns?
A bear flag pattern consists of a larger bearish candlestick (going down in price) which forms the flag pole. It’s then followed by at least three or more smaller consolidation candles, forming the flag. Usually these candles are moving up, or down, just a little bit in a tight range after the “flag pole” You will see many bear flag patterns that drop to support levels then when support breaks, price action breaks down out of the flag and continues to move lower.
Bear flag patterns are common continuation patterns found on any chart and on any time frame. The trend of the stock doesn’t necessarily have to be down, but typically these bear flags are indicative of a downward trend. The bear flag is the upside down version of the bull flag. The bearish candlesticks that form the flagpole are formed by panic selling. Typically flag poles to the downside will sprout near some major level of support. Volume tends to pick up too, further creating the pattern.
That being said, some bulls get blindsided by the bears. The bulls or longs in the stock might be anticipating the move though, and sell along with the panic sellers who weren’t expecting the price drop.
Bear flag patterns as well as bull flag patterns form when one side takes control and wins the battle over the other. Hence the tug of war between buyers and sellers.
Always remember, for every trade, there is a winner and a loser. The trick is being on the right side of the trade, and sticking to the time frame plan you’ve developed.
The bears charge ahead and surprise the bulls with the selling. Once the the flag pole ends the bulls gain confidence and begin buying; only to be faked out as the stock drops again.
Typically a flag or triangle forms, and towards the support or resistance or apex of the pattern, the volume steps up and the price drops out of the pattern.
The flag is formed by the stock bouncing off support and resistance levels. As a result, the flag is filled with indecision candles like doji candlesticks and hammer candlesticks.
These flags show the indecision before the conformation of the move down. Patterns can break down so it’s important to see what other patterns the bear flag pattern is apart of.
Bear flag patterns take patience. Yes they’re short term continuation patterns but jumping in at the wrong time can get you stuck in a fake out.
It takes patience to wait for the flag to form. You also want to plot your trend lines as these give you an entry and exit point. Find the flag portion and focus on it. What moving averages, or other variables are influencing the stock move? Put it all together.
You can find these patterns forming on any chart time frame. Day traders can short those bear flags down. That’s why patience is a virtue. If you’re short selling, you don’t want to get caught in a fake out.
How to Trade Bear Flag Patterns
- Watch for a bearish candlestick that forms a flag pole
- Look for at least 3 or more consolidation candles that moves to resistance levels
- Once price breaks below the last smaller candle take short at break below
- Watch if price can break below low of flag pole
- Use candlestick close above midway of flag as your stop
There are a couple entry spots when trading the bear flag pattern. The first entry is on the break of the flag. The second potential entry is the break of the high of the pole. Next, pay attention to volume and how it increases at key areas of support and resistance within the pattern.
The first entry at the break of the flag allows you to capitalize on the move back to the high of the pole. The stock can either break out or break down form there.
The second entry is safe because the initial breakout has happened avoiding a false break out. You can then enter on the break above the upper trend line.
Trend lines and flag poles go hand in hand. Flags tend to form in strong markets. A bear flag pattern is going to form when the stock is in a strong downturn. Using trend lines helps helps to find direction as well as breaking out of support or resistance.