Bear Flag Patterns

How to Trade a Bear Flag Pattern

10 min read

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 the price to fail below the flag to confirm a bearish breakdown. 

A bear flag pattern consists of a larger bearish candlestick (going down in price), which forms the flag pole. 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, and then when support breaks, price action breaks down out of the flag and continues to move lower.

Bear flag patterns are common continuation patterns on any chart and time frame. The trend of the stock does not necessarily have to be down, but typically, these bear flags are indicative of a downward trend. The bear flag is the inverse 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.

Bear Flag Example
  • A bear flag is a continuation pattern in technical analysis
  • The ‘flagpole’ is the trend preceding the ‘flag’
  • The ‘flag’ is a support level and highlights the consolidation after a trend
  • Bear flag suggests (but doesn’t guarantee) that the previous downtrend will continue
  • The flagpole’s height projected from the breakout level will be the proportionate target to close the position

Bull Trap

That being said, some bulls get blindsided by the bears, a bull-trap. 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 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 confirmation of the move down. Patterns can break down, so it’s important to see what other patterns the bear flag pattern is a part of.

Specifics to Keep in Mind ​

  • When bear flag trading, in order to manage risk, set a stop loss or failure level above the upper level of resistance (This is the best way to prevent a failed bear flag from biting you.)
  • If the flag portion’s retracement becomes higher than 50%, it is not a flag pattern. Ideally, we want to see a 38% or less retracement.
  • Use volume patterns to confirm bear flag price patterns. When there is rising volume going into the flagpole followed by declining volume going into the flag and decreased volume during the flag, it helps to validate the pattern and can indicate increased enthusiasm on the sell-side for the asset. Meaning that overall market momentum is negative, furthering the assumption that this preceding downtrend will continue.

Bear Flag Pattern Trading Strategy

  • Watch for a bearish candlestick that forms a flag pole
  • Look for at least three or more consolidation candles that move to resistance levels
  • Once the price breaks below the last smaller candle, take a short at break below
  • Watch if the price can break below the low of the flag pole
  • Use a candlestick close above midway of the flag as your stop

Bear Flag Pattern Example

Trading a Bear Flag Pattern
Bear Flag Chart Example

It’s rarely that pretty or easy. When we look at these patterns, there are some specifics to keep in mind, and these help us make better choices and prevent big losses. 

Increasing Volume
Failed Bear Flag

Failed Bear Flag

A failed bear flag turns into a bullish pattern instead of a bearish one. When learning about flags, a bear flag is always a bearish continuation pattern. So you’re expecting a downturn in a stock. However, patterns break down all the time. As a result, when a bear flag fails, you buy the move up instead of selling into a downturn because it turns bullish instead.

  • No closes occurred below the blue lower support level of a bear flag, which signals buyers were still interested in buying the asset at this price.
  • During the flag phase, the volume constantly decreased but not low (for seven days). Signaling that the bears never controlled the market, nor could they lower the price. 
  • The flag’s upper resistance line had a breakout on the third day. This was our first major indicator, and if it held, it was already a failed pattern.
  • The volume increased with the second break of the pattern above our upper bear flag level and signaled that the bulls were back in control, leaving the bears behind.

There are a few takeaways that we can gain from this example. 

  • If we have set our stop losses correctly, we can prevent the big losses from occurring.
  • To not do so is at our peril. We want to see lower demand, not decreasing demand, during the flag portion of the pattern.
  • If we see a retest of prior price levels, we’re concerned. As the volume increases, who’s in control? If bulls, then you need to close or never open in the first place.

Trading Failed Bear Flags

Bear flags and failed bear flag patterns are useful to recognize as they are robust and reliable indicators. If you can identify both, you’ll make better, more profitable trades and prevent accidents. If a pattern doesn’t result as expected, don’t fall into a trap. It’ll either be confirmed or unconfirmed, and you hold it as unconfirmed until it is confirmed.

You can still profit from this information by looking for a potential breakout in the opposite direction. If there’s a pattern failure, take a step back and see if you are looking too closely and if this is maybe just part of a larger pattern. 

Look for the two features of a failure:

  • Is the volume decreasing or decreasing?
  • Has the upper bound been tested?

If you see a potential breakout, look at the volume to help confirm it. Look for high volume on the breakout because then your bear flag has failed. If the volume is still low, keep watching.

Additionally, when we see a failed pattern, we can check it against the Donchian Channel indicator (DNC). You can add a DNC to your intraday chart (assuming between 1-hour and 4-hour charts) and set the input at 55. If the price is close to or touching the top DNC line, you likely have a breakout forming, not a bear flag. 

You will be ahead of the game if you can incorporate these procedures into your bear flag trading. One final thing to look out for is that particular instrument’s dark pool trading activity. A lot of times, a stock will reverse because the dark pools have placed a large order.

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Final Thoughts

Bear flag patterns take patience. They are short-term continuation patterns, but entering at the wrong time can get you stuck in a fake-out.

It takes patience to wait for the flag to form. Also, I want to plot the trend lines as these can give an entry and exit point. Find the flag portion and focus on it, such as moving averages or other variables influencing the stock move. Then, put it all together.

Find these patterns forming on any chart time frame. Day traders can short those bear flags down. That is why patience is a virtue. If short selling, do not want to get caught in a fake out.

There are a couple of 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, please 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 the trader to capitalize on the move back to the high of the pole. The stock can either break out or break down from there.

The second entry is safe because the initial breakout has happened, avoiding a false breakout. 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 will form when the stock is in a strong downturn. Using trend lines helps to find direction and break out of support or resistance.

Frequently Asked Questions

A bear flag pattern means that price action will continue into a downtrend. The flag is the consolidation area before the price ends up failing and continuing the bearish trend.

Bull flags typically occur in an uptrend, and bear flags in a downtrend. However, a bear flag can occur in an uptrend as a pullback or consolidation area before trend resumption.

To confirm that a bear flag is valid, the price action has to fail the base of the flag area. A fake-out occurs when the price reverses and goes above the flag.

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