Bull Flag, Chart Patterns, Edition #2 (05/09/2021)
Introducing a Bullish Continuation chart pattern 🐂📈 Learn technical analysis with q and save our handy cheatsheets for later 👇
Bull Flag: Classic Bullish Continuation Pattern
Short-term bullish continuation - uptrend into uptrend
Appears after a sharp move up
Average rise of 9.5%
Upward volume trend
What is the Bull Flag chart pattern?
Bull Flags are a classic price chart pattern that indicates a possible continuation of the previous uptrend in the short term.
The most recent run-up in price is generally a sharp, rapid incline - Flagpole - followed by a period of consolidation bounded by two parallel (or nearly parallel) trendlines - Flag.
While technical theory regards the Bull Flag as a sign of continuing the recent uptrend, this pattern may materialise in bull and bear markets.
According to the Encyclopedia of Chart Patterns, the Bull Flag boasts a 46% price target accuracy in bull markets versus 53% in bearish market conditions based on historical data from the US equity markets.
Qluster analysts caution against limiting due diligence to just one technical indicator. Instead, optimise decisions by referencing other indicators and analysis for a more robust reading.
Q's Advanced Technical Principle: The inherent scope of technical analysis involves recognising the underlying human psychology within a price distribution chart.
How to find Bull Flags (for any price chart!)
Like other classic chart patterns, the Bull Flag can be a relatively simple formation for new traders to learn how to pattern trade.
Traders from all financial markets may find the Bull Flag a highly versatile chart pattern, appearing across different asset price charts and timeframes.
The Bull Flag may appear in both solid uptrends and downtrends, generally towards the mid-point of the trend.
This chart pattern trader's guide and cheatsheets can be applied to all financial markets, for example:
Foreign Exchange (Forex)
Equity markets (e.g. Stocks, Indices)
Let's explore how to identify the Bull Flag pattern on Forex, Stock and Crypto charts...
Technical practitioners may find small Flags littered like roadkill alongside the price-action 'expressway'.
Let's delve deeper into this analogy and reveal a practical approach to identifying these price distribution patterns:
The market produces the Flagpole by entering the 'Price-Action Expressway' - fast-moving, sharp uptrend
Price falters and consolidates in the Flag as there is heavy congestion on the Expressway
After passing the first turn off, congestion eases on the Expressway. Price is now free to go 'pedal to the metal' - breakout upside
Qluster analysts find the simplest way to explain the components of the Bull Flag on any price chart by breaking down the pattern into four parts:
Confirmed bullish retest
Above: Visual guide of the components in the Bull Flag
Q's Guide to Identifying the Bull Flag
Before qualifying a genuine Bull Flag continuation formation, it is crucial to ensure a nearly vertical extension - No Flagpole, No Flag.
A relatively high volume profile bodes well for this explosive move upside and supports buyers in achieving a new swing high very quickly.
If you’re new to the concept of Swing High, learn more in Q’s Advanced Technical Principle below…
Q's Advanced Technical Principle: Technical analysis theory defines a swing high as a price peak followed by a decline or contraction. Depending on whether the market is rising or falling, the swing high technical indicator is may also be known as:
Rising Markets (Bull) - Higher swing highs
Weakening Uptrend or Falling Markets (Bear) - Lower swing highs
The distance between each swing high also provides technical insight into the strength of the antecedent trend.
For example, a distinctly higher swing high may indicate the enthusiasm of new buyers. Conversely, an unquestionably lower swing high may cast doubt on the strength of the previous uptrend and suggest overbearing pessimism in price action.
Observe the roadmap below, which highlights an idealised uptrend and sharp decline. For reference, the Higher Swing High and Lower Swing Highs are indicated by the trendline arrows:
Upon rapidly reaching the Flagpole peak, price action will falter and fall into a narrow trading range. As a result, volume may recede while the Flag forms during this peak consolidation period.
Ideally, the Flag should consolidate within an almost parallel range. However, recall that price distribution patterns are rarely perfect on live charts.
Technical practitioners may apply some degree of flexibility to interpreting how 'narrow' the trading range should be. Nevertheless, it is essential to verify a parallel consolidation to avoid mistaking a possible Bull Flag formation for another chart pattern similar in appearance.
Furthermore, the consolidation should complete development within the short term - if the Flag takes more than three weeks to form, it may be more accurately classified as a channel or rectangle.
Q plans to cover patterns like channels and rectangles and much more in technical analysis in new articles coming soon!
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Understanding how to identify the Bull Flag is the first step of trading the pattern successfully.
Now, the savvy Qluster Research reader might ask...
"How can the Bull Flag pattern produce reliable results on Forex, Stocks, Crypto and other asset charts?"
"What drives the formation of the Bull Flag?"
Q answers these questions by spotlighting the psychological drivers behind this classic chart pattern below 👇
Market psychology behind the Bull Flag formation
In the previous Head and Shoulders edition, Qluster analysts referred to the idealised case of our friend Jimmy.
Did you miss the plight of Jimmy and his Head and Shoulders trade? 🤔
Read last week's edition of Chart Patterns to learn more about the psychology behind one of the most reliable bearish reversal price patterns.
How the Bull Flag formation really works
Q's Advanced Technical Principle: The markets reflect human psychology! Therefore, they also tend to be equally as unpredictable.
Similar to the previous theoretical exercise, attempt to visualise the psychology that drives the behaviour of one imagined trader.
Remember that reality is a magnitude of different possible combinations formed from each individual's unique circumstances.
The following narrative illustrates why the Bull Flag chart pattern works and notes the human mechanics behind each price action. In this hypothetical scenario, try to place yourself in the shoes of the idealised market participant 'Judy'...
Recently introduced to trading, Judy had spent the past weeks teaching herself how to trade with her friend's strategy. She had started by learning how to analyse trends and was pleased about her progress.
Through initial research, Judy had read about the risks involved with trading. With the encouragement of her friends, Judy soothed her concerns.
"After all, if they can do it, why can't I?" Judy thought to herself.
Encouraged by her progress, Judy mustered up the courage and opened a real trading account. After setting up her charts, Judy began searching for the next potential opportunity in the markets.
Judy froze. She couldn't believe her eyes.
A sudden rush of excitement swept over her body. It looked like the price had suddenly broken out and was shooting up!
Quickly checking over the rules of her strategy, Judy found the technical indicators all pointed to a decisive bull run. Noticing the optimal entry had passed, Judy felt this trade was too good to sit out and quickly went to place her market order.
Judy felt intoxicated by the thrill as she quickly entered stop loss and take profit levels. Her fingers trembled as she executed her first live trade.
"Something is wrong," Judy thought to herself. The spread charged on open was huge!
Frantically, Judy checked the order details for the error.
Her heart sank.
Instead of the intended position size, Judy had mistyped her order volume and accidentally entered a position ten times greater in size.
Judy, feeling nauseous, stared intently at the candlesticks and willed this price to move up to continue. But, to her dismay, the explosive uptrend breakout faltered and suddenly collapsed.
Judy saw that a Lower High had broken the almost vertical series of Higher Highs and Higher Lows. Recalling the elemental trend sequences, she concluded the sudden uptrend must have broken down.
She knew the account equity was insufficient to sustain any significant moves against her open position. But, at the same time, Judy did not want to eat such a heavy loss this early into her trading career.
Staring at the chart, Judy steeled her nerves by referring back to her analysis - all the signs still suggested a continued push skyward.
Despite her renewing optimism, an impotent price action failed to erect to new highs. Instead, she watched in disbelief as the market produced yet another Lower Low and Lower High.
Stunned by her misfortune, Judy cursed at her monitor and admonished the market for ruining her first trade experience.
The anguish was becoming too much for Judy to bear at this point.
Price action failed again to produce signs of reversing its downward trajectory. Instead, price action deflated to Lower Highs with volume a whisper of its former self.
Her mind cloudy with pain, Judy decided that she would lose everything or nothing at all.
Without a moment's hesitation, Judy snatched the first opportunity to close her position at break-even. Then, turning her computer off, she decided to try and sleep the ordeal away.
A short while after the sting of her recent ordeal had subsided, Judy decided to try and see what went wrong with her first technical assessment.
To her regret, Judy saw that the market had broken out yet again and launched to new heights - soon after she had closed her position.
Shaking her head, Judy thought to herself...
"What did I do wrong...?"
The names and examples used in this narrative are purely fictional. This imagined scenario is intended for demonstrative purposes only.
Remember! Judy's is just one of countless idealised realities. Each trader's behaviour is influenced by their own inherently unique human elements at any given time in real market settings.
Q's Advanced Technical Principle: Technical traders base their decisions on the assumption that humans will make the same mistakes - i.e. hoomans will be hooman!
Practice mapping out the human nature in price action to help deepen your perspective and gain invaluable insights into what the Bull Flag pattern means for traders like Judy.
Qluster analysts have put together a graphical representation of human psychology - a.k.a. mistakes - thought to be driving the Bull Flag formation in this example:
With the psychology of other market participants like Judy in mind, proceed to the next section below to learn how to trade the Bull Flag chart pattern.
Download the Bull Flag cheatsheet and trader checklists for free later in this article…
How to trade the Bull Flag continuation pattern
It should be clear to Qluster readers that underlying human psychology also drives the Bull Flag pattern across markets. In many ways, the psychological drivers share stark similarities.
Recall the technical theory discussed earlier in this write-up about this classic bullish continuation pattern - it looks like a Flag set on top of a Flagpole.
Take careful note of the bullish classification.
Although it may seem obvious to some, the general principles of chart analysis imply that a Bull Flag formation located within a robust primary uptrend may produce more accurate signals.
Apply this new perspective of chart patterns to the following simple guidelines for identifying possible entry signals.
Q's Advanced Technical Principle: The art of technical analysis is an evidence-based approach to identifying trends or reversing trends and maintaining this trading posture or position for as long as possible - until the weight of evidence suggests otherwise.
How to find Bull Flag Trading Patterns in 4 Simple Steps
Step 1) Verify the prior uptrend
The first step to verifying the validity of a possible forming Bull Flag is to check for a sharp inclining uptrend to set the Flag's pole.
Avoid falling victim to poor psychology - if there's No Flag, there's No Trade.
Recall that the Bull Flag can also appear in a bear market. As mentioned earlier, the Encyclopedia of Chart Patterns provides data from US equity markets. The results presented suggest both:
Higher percentage of Bullish Flags reaching price targets
Lower break-even failure rate in falling markets
Step 2) Validate narrow consolidation within parallel range
As this article explores earlier, it is essential to ensure the consolidation period aligns with the technical definition of the Bull Flag.
While the Flag's consolidation is most commonly depicted as a retracement against the previous trend, technical theory considers a Flag consolidation tilting with the trend or horizontally to be equally correct formations.
Above: Bull Flag with Horizontal Consolidation
Above: Bull Flag with Consolidation tilting with the previous uptrend
Technical analysts have a degree of flexibility as to how they interpret or perceive a narrow trading range.
For example, some trading instruments may have a wider normal trading range than others that experience much less price volatility. In this case, the range in which the Flag consolidates may vary significantly.
However, it is imperative to validate the suspected formation with a Flag consolidation confined within two parallel lines.
Consolidations that extend outside of the parallel range may raise questions about the fidelity of the formation. If mapping the consolidation range reveals two lines with different gradients, technical practitioners should consider this a question mark on the reliability of this formation as a Bullish Flag.
Step 3) Upward volume trend on the breakout is optimal - but not a must
According to technical theory, volume characteristics generally increase with resurging buying activity and falls away when bullish interest subsides.
While volume profiles are generally necessary for a more reliable assessment, the Bull Flag is unbound by irregularities in volume as the pattern forms.
During ideal trading conditions, technical practitioners may wish to see an upwards volume trend through the formation.
Let's break the Bull Flag's volume trend down below:
Flagpole - distinctly high relative volume
Flag - low relative volume
Confirmation of Bullish Breakout - high relative volume
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Step 4) Q's Secret Sauce
Q's Advanced Technical Principle: Price patterns are like any other technical indicator - they can fail!
Our aim as technical practitioners is to adopt an objective and evidence-based approach to identifying trends and trend reversals.
Diligent traders need only seek confirmation of the Bull Flag's reliability from the market with patience.
A conservative strategy to exposing bullish continuations with the Bull Flag chart pattern is to wait for a successful bullish retest of the Upper Trendline.
After bulls regain control of the consolidation, technical traders may find a more reliable reading of the breakout if they allow buyers time to produce evidence of a successful bullish retest.
Why should you wait for confirmation of the Bull Flag formation?
Waiting for a retest to confirm the bearish reversal ensures:
Reliable reading of declining selling activity
Valid analysis of underlying demand
Higher probability of identifying more true signals from the Bull Flag chart pattern
The benefits of learning the Bull Flag for a technical trading strategy are clear.
Be patient and allow an objective judgment of price action to provide further confluence to the authenticity of the uptrend continuation following a breakout from the short-term consolidation. Qluster analysts map out two alternative entries below.
For illustrative purposes:
Understanding how to find Bull Flags on any price chart is an easy way for new traders to practice finding uptrend continuations forming in the short term.
Resist the urge to shoot yourself in the foot and first confirm a previous uptrend with a sharp incline.
Allow price action to produce evidence of a successful bullish retest at the Upper Trendline breakout for a more robust continuation pattern.
Q's Advanced Technical Principle: Always wait for the pattern to complete before taking action! Entering a position prematurely before confirming the validity of either the pattern formation or the reversal break is a brilliant strategy for donating your capital to the markets.
Simplify your due diligence by referring to Q's Trader Checklist for the Bull Flag.
Qluster analysts specifically designed these checklists to be practical, help improve price pattern fluency, and achieve technical acuity sooner!
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Trader Checklist: Bull Flag with Q's Secret Sauce
Verify prior uptrend - sharp incline for valid bull flags
Validate narrow consolidation range between parallel lines
Upward volume trend on breakout optimal - but not mandatory
Secret Sauce: Don't shoot yourself in the foot! Wait for a successful bullish retest to confirm the trend reversal...
👇 Download the Bull Flag Cheatsheet + Trader Checklist for FREE 👇
Congratulations! You've just completed an introduction to the Bull Flag chart pattern.
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