The Bull Flag Pattern: A Simple Way to Make Money in the Stock Market
GPSM | Will Bell | October 3rd, 2023
What Exactly Is A Bull Flag Pattern?
A Bull Flag Pattern appears on a chart when a stock is in a strong uptrend.
It's termed a flag pattern because it appears like a flag on a pole on a chart, and because we're in an upswing, it's considered a bullish flag.
A Bullish Flag Pattern is distinguished by the following characteristics:
• The stock has risen sharply on high relative volume, establishing the pole.
• On lighter volume, the stock consolidates near the top of the pole, forming the flag.
• The stock breaks out of a consolidation pattern on strong relative volume, indicating that the trend will continue.
Bull Flags are a component any good momentum trading method and can be applied to any time frame.
We like to scalp short-term market fluctuations by trading Bull Flags on the 2 and 5-minute time periods.
They are, however, equally effective on daily charts and are ideal for swing trading.
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The Bull Flag Pattern And How to Trade It
Bull Flag Trading is indeed a simple concept folks...
But... But.
Finding these patterns in real-time is the most difficult part of trading them that you're going to run into though.
Our Flagship Trading Newsletters stream the markets daily looking for these kinds of profit opportunities.
Golden Penny Stock Millionaires and Next Big-Cap Alerts are our 2 Flagship Trading Newsletters that scan the markets to detect Bull Flag Patterns in either penny stocks, or stocks over $5.00 a share.
The Following Is A Checklist For Trading Bull Flag Patterns:
• The stock is surging on high relative volume, preferably as a result of a news event.
• Prices consolidate at or near all-time highs, with a clear decline pattern.
• Purchase when prices break out above the consolidation pattern on heavy volume.
• Set a stop order below the bottom of the consolidation pattern.
• Profit targets should have a risk/reward ratio of at least 2:1. So, if you're betting 25 cents, your profit target is 50 cents away from your entrance price.
Volume is the most important thing to look for on the above checklist.
Volume confirms large swings and the likelihood of a successful breakout.
The second thing to look for is a defined descending trend line that you can use to determine the point of breakout.
This will be the flag's top portion.
The trend line in the bullish flag pattern above is quite recognizable and clear, so when it eventually punched through, the price soared up very quickly as seen in the chart below.
You can also notice how cleanly the line connects to the other rejected moves up (3 points of contact including the high of the flag pole).
Bull flag Patterns have a statistical advantage when traded correctly, but if the setup fails, you must know where to exit...
...or, more precisely, the point on the chart at which you know that this setup is no longer working, and it's time to abandon ship.
This deal can be managed in a variety of ways. The most popular method is to put a stop below the consolidation area. The line drawn on the bottom of the flag pattern is seen in the image 2 paragraphs up.
This is the point at which you realize that this configuration is no longer working and it's time to cut your losses and move on.
The 20-day moving average can also be used as a stop... so, if prices fall below that moving average, you would exit your trade.
The Bear Flag
A Bear Flag is the same as a Bull Flag except that the trend is downward or bearish in price action.
A fast down move on High Relative Volume will be followed by a minor retracement before continuing on the trend. The key again guys to Trading Bear Flag Patterns is to pay attention to the volume.
When volume comes in on the breakout, you should jump on board since it confirms that other traders were waiting for the same event to take place, which increases your chances of success substantially.
As Poor William says in his Stock Traders Almanac Of 2012 "For every up there's a down, for every night there's a day, for every in there's an out, and for every Bull Flag Pattern there's and equally profitable Bear Flag Pattern."
Flat Top Breakout
Chart courtesy of TrendSpider.com
The main difference between a Bull Flag stock pattern and a Flat Top Breakout is that the consolidation occurs BELOW the peak.
As a flat top breakout consolidates within a few cents of the highs, a Bull Flag Pattern will often see 2-3 red candles of pullback and may even pull back to the quicker moving averages such as the 8 or 10 EMA.
We are chasing the stock if we wait to buy the highs on the Bull Flag, and a suitable stop (at the bottom of the flag) is too far away.
So, it's best to move on the 2-3 red candles of a pullback and prudent to buy the first candle to establish a new high on a Bull Flag.
Smart traders who focus on reducing risk set stops at the lowest point of the flag, which is generally rather close.
This is the most favorable risk-reward ratio.
To increase your profits double your trade position on the high of the daybreak and then sell through that surge.
It is critical to avoid purchasing a duplicate top.
If we see a large pullback and then quickly return to the highs, we may observe a double top formation or a U shape on the chart.
There are some flawless Bull Flags with charting, but there are also some sloppier patterns.
What matters most is that when you trade Bull Flags you focus on profit and reducing risk rather than a (PPF) Perfect Pattern Formation.
It is about trading patterns on the strongest stocks.
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Last Thoughts
Bull Flag Patterns are an excellent setup for beginner traders to master since they are simple to identify and trade once you understand their mechanics.
Volume, like in most patterns, must be present on the breakout.
This supports the pattern and improves the likelihood of a successful breakout.
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