This technical analysis tool offers traders the benefit of a low-risk investment associated with quick profits. Flags appear all over the price highway, you find them in fast-moving environments, where stocks or indexes moved several points over just a few days, then the price pauses at the flag and then continues forward in the same direction. Of course, eventually, the price reverses directions, so catching the flag at the right point, is critical.
A bullish flag pattern typically has the following features:
Stock has made a strong move up on high relative volume, forming the pole
Stock consolidates near the top of the pole on lighter volume, forming the flag
Stock breaks out of consolidation pattern on high relative volume to continue the trend
For bullish patterns, the beginning will start with a sudden spike that can take many investors by surprise and cause a volume frenzy because many are trying to buy in before and during the wave of investment coming in. After a while, the price will peak and form a slight reversal giving the appearance of a tilted rectangle. A breakout occurs when the resistance trend line is broken as the prices begin to rise again and then an explosive price shift as another breakout occurs as the quick trend upward continues. A flag pattern, and technical analysis, is used to identify the possible continuation of the previous trend when the price has drifted against the same trend. When the trend resumes, the price increase should be swift, making the trade and beneficial by noticing the flag pattern, and that’s a breakout.
Bull Flag
Checklist for trading bull flag patterns:
Stock is surging up on high relative volume, preferably from a news catalyst.
Prices consolidate at or near highs with a defined pullback pattern.
Buy when prices breakout above the consolidation pattern on high volume.
Place stop order below bottom of consolidation pattern.
The main thing to look for in this pattern is volume. Volume confirms major moves and the likely hood that a breakout will be successful.
The second thing you have to look for is a defined descending trend line that you can watch as the point of breakout. This will be the top part of the flag.
Top Traders Explaining The Bull Flag Pattern
Bull Flag Pattern Examples
The Flag is a relatively rapid formation that appears as a small channel after a steep trend, which develops in the opposite direction: after an uptrend it has a downward slope and after a downtrend, an upward slope. The preceding trend is crucial for the pattern formation and is often called a flag pole.
The question of the slope of the preceding trend is somewhat controversial: some prefer it very steep, almost vertical, while others find those with slope of 45 degrees the most desirable. The channel that develops in the Flag is relatively small, thus price action in it is almost immediate compared to other patterns: it usually takes several days to couple weeks for the Flag to be completed.
Breakouts happen in both directions but virtually all Flags are continuation patterns, which means that Flags in uptrend are expected to break out upward and those in downtrend, downward. Flag performance strongly depends on the initial price change as defined by the flag pole: those with price change more than 90% show a strong directional trend. Volume is usually heavy at the pole but declines throughout the formation.
