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How can I trade the bull flag pattern in forex?

How can I trade the bull flag pattern in forex?
Asked by
Paul Beck time-icon6 days ago
1 Answer Answer Question

Justin Freeman
Answered time-icon6 days ago

A bull flag is a continuation chart pattern signalling that the market is likely to move in an uptrend. On a chart, it looks like a flag hoisted on a pole.

There are three ways traders can spot a bull flag pattern:

  • Find a strong uptrend. In this case, the range of candles is more bullish than usual, and they close near the highs.
  • After a strong uptrend, the market usually takes a break. At this point, traders can expect a potential bull flag to form since the market does a pullback.
  • Pay attention to the pullback. It usually consists of a smaller range of candles compared to the initial move, so the market would likely break out higher when the range is tighter.

Traders can use the bull flags on any time frame, and they work effectively for swing trading.

 

What are the components of the bull flag pattern?

Here are seven components of the bull flag pattern.

Uptrend

Traders consider a continuation pattern valid when there’s a previous established visible trend. They can look out for evidence of a sharp or advance move.

Flagpole formation

When a resistance is broken, the price of an asset moves upward quickly. At this point, we see the formation of the flagpole. The farthest height of the flagpole is the topmost part of the flag in the pattern.

Flag formation

The flag forms when there’s a pause period. At this point, two things happen: the price of the security drops and volume slows down. When traders draw a straight line on the tops and bottom of the security line, the lines appear parallel. Also, the parallel lines form a sloping rectangle that resembles a flag.

Heavy volume of trading

A heavy trading volume indicates that a sharp and relatively quick move, which results in the formation of a flagpole, is taking place. Traders should check for a consistent increase in the price over the period where they locate the bull pattern.

Resistance breaking

Before traders can see a breaking point, they need to look at the trading volume of the asset. If price increases after a poor performance in the price volume during the pause period, it shows that the asset is resuming its uptrend and price has broken the resistance.

Short duration

Professional traders have different opinions about the flag pattern depending on the actual valid duration. Nevertheless, the best bull flag patterns appear for just one to four weeks.

Breakout expectation target

The price of the breakout point is usually significant. Generally, traders attach a line from the lowest corner of the flag to the highest point, which shows how high the price should go before a downtrend begins.

The illustration above shows the movement of the bullish flag on a chart

 

How to trade the bull flag pattern

When price breaks out of a ranging market, a pullback occurs for the first time. The pullbacks have shallow retracement that most traders avoid because they don’t want to trade against the strong momentum, but the shallow retracement offers a high probability of a pullback trade.

There are four steps involved in finding high-probability pullback trades:

  1. Look for a range market.
  2. Allow the market to break out.
  3. Wait until a bull flag pattern forms.
  4. Initiate a buy on the break of the highs.

When there’s a strong trending market, traders can buy breakouts, which is easier than waiting for pullbacks that rarely occur.

Traders can use the bull flag pattern as an entry trigger by doing the following:

  • Locate a strong trending market with the price above 20MA.
  • Wait until a bull flag pattern forms.
  • Initiate a buy on the break of the highs.

It is typical for traders to expect a flag pattern to form during a breakout or strong uptrend, but there are instances where flag patterns form in a range market at resistance. This happens because buyers or sellers stepping in aren’t willing to buy at the resistance level.

Interestingly, it’s a sign of strength, and the market could break out higher.

Traders can spot this by doing the following:

  • Locate a range market.
  • Wait for the flag pattern to form at resistance.
  • Take a trade at the break of the highs.

How to place stops, entries, and exits when trading the bull flag pattern

Traders can wait for the market to close on the tops or enter on the break of the tops. It is important to note that entering on the break of the highs could be a false breakout. However, if the breakout is real, it will be the best possible price traders get.

Traders can reduce the chance of a false breakout when they wait for a close above the highs. Regardless of the approach, traders have to stay consistent.

Experienced traders give trades more room by setting stop levels a few distances away from the market structure. They can do this by locating the swing low of the bull flag pattern and placing the stop loss 1 ATR below the low.

For exits, traders should have a pre-determined profit target based on the length of the flagpole, or they can trail their stop loss until it takes them out of the trade.

 

The bottom line

It’s easy for traders to spot and trade bull flag patterns as long as they understand the mechanics behind them. They must ensure that volume is present on the breakout to increase their likelihood of success.

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