Bearish Flag Pattern: 5 Steps To Profit When Markets Fall

Bear Flag Pattern

We know that you’ll walk away from a stronger, more confident, and street-wise trader. 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. The downtrend continues, and more sell positions are opened, which increases the selling pressure.

Should I buy bullish or bearish?

Growth stocks in bull markets tend to perform well, while value stocks are usually better buys in bear markets. Value stocks are generally less popular in bull markets based on the perception that, when the economy is growing, "undervalued" stocks must be cheap for a reason.

When the lower trendline breaks, it triggers panic sellers as the downtrend resumes another leg down. Just like the bull flag, the severity of the drop on the flagpole determines how strong the bear flag can be. That’s why higher timeframe analysis help to do a technical analysis only in the direction of the major trend. In this case, the higher timeframe trend should be bearish because we are dealing with a bearish flag pattern. On the other hand, lackluster volumes when the price breaks above the bull flag’s upper trendline increase the possibility of a fakeout.

Bull flag and bear flag patterns summed up

With most bear flag patterns, the volume increases when the pole is being formed, then remains at its new level. Volume typically does not decline during the consolidation period as downward trends are often a vicious cycle driven by investor fear over falling prices. As such, the volume is upwards as the remaining investors feel compelled to take action. A flag pattern is a trend continuation pattern, appropriately named after it’s visual similarity to a flag on a flagpole.

Bear Flag Pattern

By signing up as a member you acknowledge that we are not providing financial advice and that you are making the decision on the trades you place in the markets. We have no knowledge of the level of money you are trading with or the level of risk you are taking with each trade. Although the pattern looks simple and is highly useful, it can be challenging for beginners. That’s why we recommend you start trading the pattern on a demo account.

How to Trade Bear Flag Pattern

Chasing prices lower after a breakout hoping to catch a piece of the action is always a bad idea, for several reasons. This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision. To limit losses in a fakeout scenario, it is important to place a stop loss just above the entry levels. In either case, the short target is, as a rule, measured by subtracting the flag’s peak from the flagpole size.

And, secondly, the risk to reward ratio of such trades is always skewed against the trader. Bear in mind that the small consolidation aka Bear Flag Pattern the flag is a period of pause or correction in the bearish trend. Typically, the price should not retrace more than 50% of the pole.

Conclusion: Should You Use Bear Flag and Bull Flag Chart Patterns?

As a note of caution, traders should maintain their risks by placing a stop loss just below their entry levels. That will enable them to reduce their losses if the bull flag gets invalidated. Traders may first identify whether there is a consistent trend. This could be as a bull flag appearing in a market with accelerating interest or a bear flag forming in a trend with weakening momentum.

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  • I hope this lesson has provided you with a blueprint of what to look for when identifying bullish and bearish flag patterns.
  • The distance of the flag pole is what we use for the measured objective.
  • The flagpole is the initial strong move in the opposite direction of the trend, forming the flag pattern’s basis.
  • A bull flag is similar to a bear flag except the trend direction is upwards.
  • Volume typically does not decline during the consolidation period as downward trends are often a vicious cycle driven by investor fear over falling prices.

Traders should also analyze volume to confirm the pattern’s reliability. A continuation pattern in technical analysis is a pattern that suggests a temporary pause in a prevailing trend, followed by the continuation of the same trend. Continuation patterns can be bullish or bearish, depending on the direction of the prevailing trend.

How do you target stop loss in bear flag patterns?

It’ll either be confirmed or unconfirmed, and you hold it as unconfirmed till it is confirmed. Please remember that the bear flag pattern is considered to have formed only after it breaks through its bottom line. You can enter the market by opening a trade in the main trend direction only after that. It is a bearish continuation pattern that indicates a continuation of a downtrend. Traders often use bear flags to identify potential shorting opportunities in the market.

Bear Flag Pattern

Also, if you’re a newbie, it may be challenging to identify it on the chart. A downtrend is a series of lower highs and lower lows in an asset’s price over a period of time. It indicates that the market sentiment is bearish, with more sellers than buyers, causing prices to decline. A downtrend can last weeks, months, or even years, depending on the underlying factors driving the trend. This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result.