Bull Flag Patterns

How to Trade a Bull Flag Pattern

What does a bull flag pattern look like? It’s a beautiful pattern that excites momentum traders around the world. Bull flag patterns are one of the most popular bullish patterns. They consist of either a large bullish candlestick or several smaller bullish candlesticks up, forming the flag pole, followed by several smaller bearish candlesticks pulling back down for consolidation, which forms the flag. Finally, look for a price move out of the flag to confirm a bullish breakout. 

A bull flag pattern consists of a larger bullish candlestick that forms the flag pole. It’s then followed by at least three smaller consolidation candles, forming the flag. You will see many bull flag patterns that consolidate near support levels than when support holds; price action breaks out of the flag. Bull flag patterns are a common pattern found in charts. Bull Flags are known as a bullish continuation pattern. It has a big move-up together with consolidation. The bull flag pattern is one of the most common patterns on charts.

Candlesticks are a way to gauge the way traders feel about a stock. We may be scattered worldwide and don’t know each other; however, candlesticks tell us how we all feel about a security

A bull flag chart pattern is seen when a stock is in a strong uptrend. As a result, it’s called a bull flag because of its shape. First, there’s a strong move up, resulting in bullish candlesticks forming the pole.

The flag is formed by the consolidation after that big move up. As a result, the consolidation period can be filled with candles such as doji candlesticks and hammer candlesticks. These tell a story of indecision.

Hence, the shape of the flag is less important than what it’s telling you. For example, a stock with a strong move up and consolidates but refuses to drop tells a story. As a result, know what the story is.

When you see that pattern, you know another strong rise is coming. But, of course, no chart pattern will look perfect, and that’s ok, hence why we study.

Bull Flag Patterns

Basics of Bull Flag Patterns

If you’ve been in candlesticks school and paying attention, then you’ve heard the phrase, find the patterns within the pattern. Candlesticks group together over some time to form these patterns.

Bull flag candlesticks often look like they can be a part of a larger pattern. For example, you may find them within bullish patterns like the cup and handle pattern or inverse head and shoulders pattern. Not every pattern will look exactly like the textbooks. That’s why spending time with experienced traders is important so they can point out these imperfect patterns for you in the wild.

Again, looking at real-world charts and spotting their patterns is important. They’re not always picture-perfect. Bull flags may form, and then again, they may break down typically because you missed a resistance level or something else that caused the pattern to fail. No pattern is a guarantee of results.

You’ll find trading difficult if you rely on one pattern to tell the story. That’s why it’s so important to see patterns within patterns.

How to Identify a Bull Flag Pattern

The bull flag pattern occurs in a strong uptrend and is considered a continuation pattern. This pattern is characterized by a brief consolidation phase where the price moves horizontally in a narrow channel (the flag) after a sharp price increase (the pole). 

Before deciding to make a trade, it’s crucial to identify and confirm the pattern accurately. 

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The Technicals

Technical analysis is important, but it’s nothing without candlesticks. Candlesticks are the most important part of the technical analysis basics. They form key support and resistance areas.

Candlesticks alone do not form support and resistance areas! You can use moving averages and part of your trading plan to form a complete picture. Many traders will use the nine-period exponential moving average and the VWAP trading strategy as additional buy and sell signals.

Bull flags can be found on any time frame you use for trading. Coupling them with moving averages like the 9 and 20 exponential moving averages gives you a pretty good formula for trading.

Moving average crossovers on any time frame supply important buy and sell signals. Coupling these different tools makes for a clearer picture.

Bull Flag Pattern Trading Strategy

  • Watch for a bullish candlestick that forms a flagpole
  • Look for at least three or more consolidation candles that hold support levels
  • Once the price breaks above the last smaller consolidation candle, take entry at a break of high
  • Watch if the price can break above the high of the flag pole
  • Use a candlestick close below midway of the flag as your stop

1. Bull Flag Pattern Entry

The best place to enter a trade in the bull flag pattern is at the flag’s upper trendline breakout. Additionally, significant trading volume is imperative. This indicates the resumption of the upward trend after the brief consolidation phase.

2. Bull Flag Pattern Profit Target

You can set your profit targets in a few different ways. I like using Fibonacci retracements, prior highs, or resistance levels. One popular method is using the height of the pole to project a potential price target for the pattern. You can measure the pole’s height and add it to the breakout point to obtain an estimated price target. Traders can set multiple targets or use trailing stops to maximize profits as the price moves in their favor.

3. Bull Flag Pattern Stop Loss

Setting a stop-loss level is crucial to limit potential losses in case the pattern fails. The stop-loss order should be placed below the lower trendline of the flag or the nearest significant support level. This limits your downside risk and protects your pocketbook.

Bull Flag Patterns Examples

Bull Flag AAPL

This is an example of a bull flag formation in the premarket on a 4-hour chart of $AAPL. The flag formation was set up perfectly for the opening bell. Once the price broke out of the flag at open, you would have taken a long position and used a candle close below the flag as a stop.

As price broke out, you’d watch to see if the price went up to break premarket highs at the top of the flag pole. The bigger pattern that formed before the flag was an inverse head and shoulders.

More Examples

TRCH Bull Flag

Bull flags are very popular on penny stocks. Check out the before and after on this 1-minute chart of $TRCH. Above, you see the flags firing off. Check the image below for the third flag pole out.

Chart Example

This third formation of the flag shows strong bullish momentum. If three large bull flags form, be careful of a large bearish reversal because price action will be overextended. The last flag often turns into a head and shoulders pattern.

Cup and Handle Flag

Flag Handle Formation

This is a 5 minute chart of NVDA. The gray shaded area is the aftermarket. Many of times bull flags make up the handle area of a cup and handle. It could be a short or long handle area, depending on the size of the cup. This is why some traders will take a trade on the handle instead of waiting for the breakout of the top of the cup.

There are short term patterns that many of times make up the larger patterns overall. This is why when you are looking at short term price action it’s important to look at the bigger pattern overall. In this scenario there was a large breakout that formed a big rising wedge pattern. The breakout might have been after positive new catalyst or earnings.

Confirmation is Key

Bull flag trading signals a continuation of a strong upward trend. Just because they’re common doesn’t mean they should be taken lightly.

It would be best to have confirmation, such as a strong move-up. The formation becomes questionable without that, and trading it as a bull flag is risky. It would be best to have the volume on the first move, along with consolidation.

A second strong move up after that consolidation is also necessary. As stated earlier, every pattern will look different every time. Sometimes, they’re messy, and bull flags can take several forms.

No matter what bull flags look like, they’re always a sign of a potentially strong move upcoming. 

Final Thoughts

Bull flags are happy little patterns that show the bulls are in control. To see them all, you must be like an athlete who spends hours studying their opponent. They train to better themselves, and just the same, traders need to study these patterns so they are ready when they step in the ring. But, unfortunately, trading isn’t for the faint of heart. Even the best traders fail.

Michael Jordan and Tom Brady didn’t just wake up the greatest athletes of their sport. They dedicated time and effort to be great. They have failed, yet it doesn’t deter them. We can learn a lot from that approach.

Frequently Asked Questions

A bull flag breakout happens when a large bullish candlestick forms a flag pole with consolidation candles that pull back near support levels. When a bullish candlestick breaks above the consolidation of a flag, a potential breakout occurs. Ideally, you’d like to see the price continue and break above the top of the flag pole.

The target of the bull flag is the top of the flag pole. Once the price breaks out of the flag, traders watch to see if the price will move up to the top of the flag pole for continuation.

A double top pattern is shaped like an 'M' and is bearish. A bull flag pattern is shaped like a flag and is bullish.

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