Bull Flag Pattern Trading 101 Explained, My Top Methods

August 1, 2021

What is a Bull Flag Pattern?

What is a Bull Flag Pattern?

A Bull Flag Pattern is a bullish continuation pattern. The pattern creates a long lower shadow and forms after an upward trend. Its high becomes the first resistance level for the stock.

If you are a trader who uses technical analysis to help you trade, then this article will be very useful to you, and might even give you some new ideas about how to anticipate reversals in stocks that are on run-ups. In this article, we take a look at various ways of trading (or avoiding) bull flag patterns based on their characteristics.

What is a Bull Flag Pattern?

If you study the image above, you will see that a bull flag pattern has 5 components. However, for a bull flag pattern to exist, 3 of these components must be present and they must appear in an order as described below:

First Component: The first component is the run-up (or the trend) that precedes its formation. This upward run must show high volume if it is to qualify as a strong move.

If there was no high volume preceding the formation of this pattern, then it cannot be considered valid.

This is because without strong demand coming into play as confirmed by high volume, any reversal patterns that might form along with this stock are not worth trading. In other words, keep your analysis simple and avoid over-analyzing the chart if you want to reduce your risk.

Second Component: The second component is the flag. A flag pattern can be a horizontal price move or it can slope downward, but in either case, it must show two distinct tops/bottoms along its formation. These tops/bottoms should also have high volume for this pattern to qualify as a bull flag.

If there was no high volume preceding these price moves within this pattern, then its validity would be questioned.

In addition, for it to qualify it must be at least twice the length of the distance between tops/bottoms A and B. This means that top C has to be lower than bottoms A and B combined (A+B).

Third Component: The third and final component of the bull flag pattern is its lower shadow. This is created when the price falls short of reaching top B. In this particular sample, note that the volume for this move is lower than that for the advance to top A in order to confirm it as a low-risk reversal signal.

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Should You Enter The Trade?

Now, let's take a look at some important characteristics that will be extremely helpful in helping you determine whether or not you should enter into a trade based on your analysis from a stock chart.

Depending on where the flag forms within the trend, it may be more or less reliable.

If it forms at the end of the trend following a few days of consolidation, then we can expect a quick reversal and thus have a lower risk.

For example, if the stock is trading in an uptrend for 3 days before morphing into this pattern but then consolidates sideways for 2 more days before breaking out (or falling) from it, then we can expect quicker reversals with higher reliability.

However, if there was no preceding consolidation within the trend as seen in this example, then any bullish continuation would only be confirmed after 1-2 weeks of sideways price movement.

During these two weeks while prices move sideways buyers are likely to get nervous and sellers will become over identified. 

Some common continuation patterns include the ascending triangle/s, rising wedge, and double bottom/s. They tend to form at the bottoms of market cycles rather than their continuation (which the bull flag pattern forms). In this sense, they will serve as better entry points if one takes the time to wait for them and because they tend to have higher reliability in terms of continuations.

Continuation Patterns

This is because the market may be about to turn red and they will want to sell as soon as possible before get left behind. These trend breakouts tend to occur with high volatility and volume. Thus, they are reliable in terms of a quick bullish reversal following this pattern.  

In addition to bull flag patterns, there are also other reversal patterns that can signal good entry points if one were to wait near prior tops/bottoms. 

Common reversal patterns include descending triangles/inverse head and shoulders, double top/bottom, ascending/descending wedges, rectangle patterns, etc. They form at the tops/bottoms of market cycles rather than their continuation (which the bull flag pattern forms). They will even serve as better entry points if one takes the time to wait for them and because they tend to have higher reliability in terms of reversals.

These reversal patterns are similar to bull flag patterns but tend to form at the tops/bottoms of market cycles rather than their continuation (which the bull flag pattern forms). They will even serve as better entry points if one takes the time to wait for them and because they tend to have higher reliability in terms of reversals.

The fact is that oftentimes there's a bit more sophistication required when waiting for trend breakouts and reversal patterns. It requires patience and an ability to discern whether or not a breakout has enough momentum behind it. Or whether or not a reversal pattern has formed correctly with respect to horizontal support/resistance lines and prior highs/lows.

Reversal Patterns

Key Takeaways: Bull flag price patterns are very reliable at reversing an existing bull or bear run during the pullback phase of formation. 

These patterns form at or near prior highs/lows, and thus by waiting for them one can increase his diversification in trading.

In addition, one can use this bull flag pattern as a way to enter into the market following a sudden reversal during its formation.

So instead of waiting on high-volume for confirmation that price will reverse course once it hits tops A or B, you can identify low-risk entries all along the way as long as you wait until prices pull back within these patterns (as seen in this example).

Bull Flag Pattern Rules

The following rules govern all bull flag patterns when the pattern appears on a daily chart:

  • A bullish mini candlestick pattern of two or more consecutive red candlesticks must precede the bullish pre-pattern.
  • Once revealed, prices should not violate previous highs.
  • The second day of the bullish pre-pattern is a white (bullish) candlestick that moves back into positive territory.
  • Most importantly, price action after revealing should be characterized by an increase in volume and an upside break in order for bulls to pick up momentum. If these conditions are met, then bulls will typically take control creating new highs and extending gains until either extreme selling pressure or weakness in economic factors causes prices to retrace.

Any time a bullish pre-pattern appears on the daily chart, it must be confirmed by price action within 48 hours.

Failure to do so means that a reversal has occurred and prices will typically revert back into negative territory regardless of whether or not the flag completes its structure.

So how does one detect an upside break (bullish continuation) indicator? It is an obvious price gap in candlesticks that occurs at or near the same level as the pattern's apex.

Remember, bulls did not have enough power to push prices up right after revealing; however, once buyers initiate powerful buying pressure after prices reverse out of negative territory, they are now strong enough to create an upside price gap nearly identical to where the pattern took shape.

This is known as an upside break and is a bullish continuation (confirmation) signal in the form of a price gap.

An additional characteristic to watch for once the flagpole pattern has been completed, is whether or not prices can sustain any increases created after revealing.

A retest of previous highs should always be expected when prices reverse at or near a trend line support, prior horizontal resistance, a rising 50% Fibonacci retracement level, etc.

Again, if this occurs and sellers counter with aggressive price action that causes bears to take control again, then go ahead and assume a bearish reversal has occurred and wait for more definitive confirmation before assuming the flag will complete its structure. 

Bull Flag Trading Vs Bear Flag Trading

Bullish VS Bearish Market

A bull flag is a bullish signal and indicates that the price has made a lower low on the day, typically between or near two short-term moving averages. A bull flag typically forms during an uptrend, but if it does not form during an uptrend then it may be the early sign of a possible reversal coming.

Bear Flag is a bearish signal when the price has made two consecutive higher highs with no higher high following for at least three days).

This can occur at any time in a stock's life cycle when there are long periods of stability. The semicircle pattern looks like what you would display if you try to encircle prey with your arms and hands.

It often brings forth buying opportunities as traders react to the signal. The pattern is formed with advances and declines in a trend of prices that alternate between weakness and strength.

See Also: Bullish Vs Bearish, EVERYTHING You Should Know!

How to Trade The Bull Flag Pattern

What is a Bull Flag Pattern?

Bull flags provide a valuable opportunity for traders to set up profitable trades when the market is trending higher

They are not alone, however; they come in many shapes and sizes, and in some of them you shouldn't enter a trade at all because the risk/rewards are unbalanced.

It's important to understand how bull flag patterns can benefit your trading strategy so that you can spot them quickly on future charts.

The ideal scenario for a bull flag pattern is when it forms near significant support or resistance levels, however, even if it does not, there are still circumstances where we can expect the stock price to move in our favor with high confidence.

When trading bull flags, it's important to pay attention both to fundamental information about the underlying company (any key news, earnings releases or important events) and to technical signals that tell you about the state of the market.

You must use fundamental data to decide which stocks are worth trading; but if a stock is already in an uptrend, then it is more likely to continue moving up after breaking out above resistance (in lower time frames).

Bull flag patterns appear quite often and there are many variations; some take place over just a few days while others form during long periods of several weeks.

Attempting long-term bull flag trades can be risky because you will be invested for so much time when prices could spiral down despite your efforts.

The bottom line is that all patterns require patience because they can take anywhere from a few hours to months before the break-out takes place.

But if you are disciplined and wait for that breakout, then the results may well be worth the wait!

Some of the modified bull flag formations can set up very profitable short trades; this is something every trader should consider.

The most common sign we look for is the "Flagpole", but it must be confirmed by a breakout above resistance.

The reason we want to see both signs of strength (volume and price) is that we are trying to identify those stocks which have overcome the most danger during a downtrend, and therefore are more likely to continue in an uptrend after breaking out of the bull flag resistance.

Also, volume bars with a higher than average difference between open and close prices often provide early signals about upcoming breakouts to the upside; this suggests that there has been high trading activity within each bar - buying pressure or short covering can push price quickly up through major levels of support/resistance.

In summary: Bull flags are not too difficult to spot once you've them a few times on a chart, and there is no reason why they can't be incorporated into your trading plan.

About the author 

Jenna Lofton, the founder of StockHitter.com, has been actively trading stocks and investing for nearly 11 years.

She holds an MBA in Finance, and another in Business Administration, and lives in Staten Island, NY.

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