Watch our video on how to identify and trade bear flag patterns.
What Is a Bear Flag Pattern & How to Identify These Patterns?
- A bear flag pattern consists of a larger bearish candlestick which forms the flag pole. It's then followed by at least three or more smaller consolidation candles, forming the flag. You will see many bear flag patterns that consolidate near resistance levels then when support holds, price action breaks down out of the flag.
Bear flag patterns are common continuation patterns found on any chart and 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. Watch our video above to learn more.
As we well know, the stock market is a war between the bulls and the bears. When the bears are winning, the market is down. The bearish candlesticks that form the flagpole is formed by panic selling. Typically flag poles to the downside will sprout near some major level of support.
Thus 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.
Rice trader Homma saw the connection between this hundreds of year ago. As a result, he was compelled to come up with a way to track these moves.
Because of that we now have Japanese candlesticks patterns. This allows us to gauge the feelings of traders all over the world. We have a handle on the pulse of traders.
1. Basics of Bear Flag Patterns
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. See our pattern below.
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.We teach how to trade bear flag patterns on our live daily streams. Check out our trading service to learn more. Learning patterns live with us in our trade room could be extremely helpful for some of you reading this article. Also, you're going to learn a good rules based trading system, which is paramount to your trading success. No rules, no success. Break the rules, and break your account. It's that simple!
2. Patterns & Inside Patterns
Stock charts are filled with many different patterns. Traders are very aware of these as they trade the patterns. Patterns can confirm a direction or trend the stock is headed towards.
Can you find bear flag patterns in triangles or a head and shoulders pattern? Just following what one pattern tells you is a recipe for disaster.
Patterns break down all the time so it’s important to be able to see a bigger picture. Smart trading helps minimize loss.
3. Pair With Technicals
You’ve heard it once, you’ve heard it a million times; without candlesticks the technical indicators mean nothing. Candlesticks are the first line of defense in technical trading.
The real bodies and wicks of candlesticks form key areas of support and resistance. Now, you may know everything about the VWAP trading strategy or the simple moving average formula.
However, without a knowledge of candlesticks they mean nothing. Traders are intensely aware of support and resistance because of its importance. Moving averages can be support and resistance as well as buy and sell signals.
Ideally, you put it all together and make an informed trade and give yourself the best possible outcome for success.
4. Patience With Bear Flag Patterns
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
- 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 consolidation candle take short at break below low.
- 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.
Some people use Fibonacci for exits, some will use yesterdays close price, or low. Having a target is KEY. If you don't have an entry, stop and target price for profit, don't bother trading. Seriously!
1. Trend Lines and Profit Targets
The trend lines can be used as profit targets as well as confirmation of the pattern. You can measure price between the trend lines for a profit target.
For example, if there’s a difference of $7 between the trend lines, and the break out point is $27, your profit target can be $34.
It’s a safe approach to keeping your greed in check. It can work with any price difference within the lines. Take our candlesticks patterns course.
Practice finding bear flag patterns as well as patterns within the patterns. Open a paper trading account with Thinkorswim and practice trading those patterns.
If you are having trouble finding candlestick patterns, take our free candlestick courses as well as try out TrendSpider.
Trendspider has an automated candlestick recognition setting that will display candlesticks for you! It couldn't get any easier than that!
We also share stock alerts with our members which are great for those of you who are looking for trades along with the education that we offer.
Find out what you can improve on and what you do well. Then you’ll be prepared when it comes time to put skin in the game.
Always practice in a simulated environment first. Do astronauts go to space without practicing in an Olympic swimming pool? No! You have to take it that seriously too!