Classic Pattern - Bull and Bear Flag

Bear Flag

"Bear Flags" usually occur as markets fall from a base and pause in a downtrend. They are almost identical to "Bull flags," but in the opposite direction. "Bear flags" can be easily spotted as they make "higher highs" and "higher lows" within the "flag" area. The trend lines connecting "highs" and "lows" are almost parallel. A clear breakdown confirmation is needed to trade these patterns as the price continues in the same direction prior to the "flag" formation. Like "Bull flags," "Bear flags" are also very reliable.



Trade: After a series of "higher high" tops and "higher low" bottoms, prices will breakout of the lower-trend line. Wait for confirmation of breakdown with a long range bar. One of the best confirmations occur when prices "close" below a previous "swing low" (of bear flag). Enter a "short" trade one tick below the "swing low" or previous bars7 low.

Target: A typical target in "Bear flags" is from 76% to 100% of the AB range prior to the "Bear flag". The secondary targets are from 138% to 162% of the range AB.

Stop: Place a "stop" order above C to protect the "short" trade.

Bull Flag

"Flags" are continuation patterns representing a small pause in the market trend. They can be easily spotted as they appear right after a sudden and quick burst from a trading range. In dynamic and quick markets, Flags form as prices pause and move in the same direction as the prior trend after a clear breakout. Flags are known to be very reliable patterns. "Bull Flag" patterns can be spotted when the market breaks out from a range and makes "lower highs" and "lower lows" in a tight formation. The trend lines connecting these highs and lows are near parallel. Also, tight and well defined "flags" perform better than short and zigzag "flags."

Trade: After a series of "lower highs" and "lower lows," connect prices with two parallel trend lines. Wait for a clear breakout to the upside. Price closing outside the upper trend line is the first sign of a breakout. Enter a "long" trade one tick above the high of the breakout bar. Another clear signal of a "Bull flag" breakout occurs when prices trade above the recent "swing high".

Target: Measure the prior distance from the "swing low" at point A to the "flag" formation at point B. Target 70% to 100% of this range from C. Secondary targets in bull markets are 138% to 162% of AB from C.

Stop: Place a "stop" order below the "low" of the "flag."