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.
One of the best patterns to look for in technical trading is either a bull or bear flag. This is one of the first patterns we learn and is considered the most reliable. However, if misidentified can lead to big losses. Today, we’ll look at the pattern then do a post mortem on when a bear flag is wrongly identified and what happens when this failed bear flag pattern occurs.
Here is the classic view of the bear flag.
In action we want to see something like this:
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.
Let’s assume we see the following; it appears to have potential:
We have some slightly increased volume prior to a pole and then the volume is decreasing. The flag generally moving back up as we would expect for a bear flag, and we will have a similar decrease (the size of the flag’s pole) that we can profit on. But this is the result.
There are a few takeaways that we can gain from this example.
Bear flags AND failed bear flag patterns are useful to recognize as they will be both robust and reliable indicators. If you can identify both, you’ll make better, more profitable trades and prevent accidents. If you see that 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 till it is confirmed
You can still profit from this information by looking for a potential break out in the opposite direction. If there’s a pattern failure, take a step back and see if you are looking too closely and that maybe this is just part of a larger pattern.
Look for the two features of a failure:
If you see a potential breakout, look at the volume to help confirm this breakout. Look for high volume on the breakout because then your bear flag has failed. If the volume is still low, then 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 1hr and 4hr charts) and set the input at 55. If the price is close to or touching the top DNC line, then you likely have a break out forming, not a bear flag.
If you can incorporate these procedures into your bear flag trading, you will be ahead of the game.
As always, never trade more than you are comfortable with, and good luck with all your trades.