Flag patterns in forex trading help identify the continuations of previous trends from a point at which the price swayed away against the same trend. They can determine whether the trend should resume, how rapid a price increase is and what is the right time to trade.Bullish and bearish are the two main types of flag pattern that you need to know in order to place successful trades. But what’s the difference between these two? Let’s find out.
What is a flag pattern in forex?
The Forex flag pattern is a graphical representation that appears like a slight consolidation between impulsive legs of any particular trend. When this pattern appears on a chart as a pictorial representation, the price action mostly breaks out in the exact direction of the ongoing movement.By studying and understanding these flag chart patterns, traders are able to confirm price trends, decide their entry points, and exit as per their trading capacity. This strengthens a trader’s technical analysis that is highly accurate in predicting prices and exchange rates of currency pairs.Each flag pattern consists of two main parts:The flag pole: The flagpole is the vertical line that represents a trend impulse. Every trending move has the capacity to transition into a flag, depicting that every trend impulse can appear to be a flagpole. The most significant impulse move is the flag pole, followed by a brief consolidation that seems like a flag.The flag: After the pole, a flag pattern then begins to form with the commencement of a trade within a tight range. This upward and downward movement of price fluctuations takes the appearance of the flag/flag body. It consists of price actions which are evenly distributed as tops and bottoms.
Types of flag patterns
What is a Bullish flag?
A bull flag is basically a continuous pattern that appears as a brief pause in the trend by following a strong price move, moving higher. It looks like a downward sloping rectangle, often represented by two parallel trend lines against the ongoing trend lines. During this period that we also call consolidation, volumes mostly dry up through its formation and push the pattern higher on the price breakout.
Identifying a bullish flag in forex trading
The bullish flag pattern has several components. Hence, at times it can be complex to identify it on a Forex chart. Traders need to identify and understand these components closely in order to be able to locate a bull flag as soon as it appears on the Forex charts to trade this pattern successfully. Significant things to look out for in a bull flag pattern are:
- A preceding uptrend with the flag pole
- A downward sloping consolidation
- The retracement of the flag pattern should end at less than 38% of the original trend. Otherwise, it may not be considered as a flag pattern.
- The price generally breaks higher, with a length that is equal to or greater than the flag pole’s size.
Reliability:
When all components of the flag pattern are correctly identified and present within the chart, this particular pattern is considered as an inspiration to trade and make informed decisions.
Advantages:
- Works in all the financial markets and not just Forex
- Patterns help in determining exit and entry points
- Great risk-reward ratio
Disadvantages:
- Complicated to be understood by novice Forex traders
- Not all signals work all the time
- Difficult to distinguish from the regular rectangle pattern in the chart
What is a Bearish flag?
A bear flag is a technical pattern that gives an extension to an existing downward trend. It can also be called the mirror opposite of a bull flag. The formation is underlined from an initial directional move that points downwards the ground, which is then followed by a consolidation in an upwards direction. The downward movement here is considered as the flagpole, while the consolidation is the remaining flag body.Recognizing a bearish flag is not that complicated, especially when you understand its components and what a bullish flag is. The pattern can be divided into 3 main parts, namely –
- Traders need to find the flagpole, which can be identified as a steep initial decline. It can also be a slowly sloping decline that establishes the basis of this flag trend.
- The bear flag is then identified as the represented period of consolidation that occurs after completing the initial decline of the prices. Prices may slowly go in the upward direction during this period and retrace some portion of the initial move. Then, the traders need to wait for a price break lower than the already lowered lows, in the same direction of the trend.
- Once the prices fall further, this is the point where traders find their final component to identify a bearish flag pattern. The profit target is the potential value from a currency pair’s subsequent decline in the price. The pricing can be recognized by measuring the distance in pips of their initial decline. This value is then subtracted from the peak resistance line from the consolidating flag to identify the potential profit.
Identifying a bearish flag in Forex trading
- A preceding downtrend with the flag pole
- An upward sloping consolidation
- The retracement of the flag pattern should end at less than 38% of the original trend. Otherwise, it may not be considered as a flag pattern.
- Look for price breaks lower than usual, equal to the flag pole’s length.
Reliability:
Bear flags are considered as an extremely reliable price pattern when all their unique formations are correctly identified and measured.
Advantages:
- It can be applied to all the financial markets and not just the foreign exchange market.
- Provides traders with the entry, exit, stop and limit levels.
- Favorable risk-reward ratios.
Disadvantages:
- Just like the bull flag, its only drawback is that it is a multifaceted pattern that can be challenging to be understood by novice traders due to its complexity.
Types of Bearish flags
1. Inverted cup and handle
The inverted cup and handle is a bearish continuation pattern that occurs in a downtrend and resembles the shape of a ‘cup’ (inverted u shape) and handle (upward sloping line). The pattern provides traders with ideal sell signals as it indicates that the market prices are going to fall further.
2. Falling range flags or descending flags
The falling range flag is a downtrend confirmation pattern that signals a continuous decline in currency pair prices. The flag is identified in short downtrends and provides traders with ideal exit price levels. It is called the ‘range’ flag because currency pairs' low and high prices trade in a narrow range, signalling a downtrend continuation.
3. Rising wedges
Rising wedges is a chart pattern that occurs in a market making higher highs and higher lows, signalling a bearish reversal. It provides traders with prices to either sell or short trade with an expectation of the market narrowing even further.
4. Ascending channel
The ascending channel pattern provides traders with information about the currency pair price action that occurs between two parallel upward-sloping lines. It appears in a market with higher lows and higher highs. These patterns confirm a downtrend and provide traders with ideal exit price levels.
Types of Bullish flags
1. Cup and handle
The cup and handle pattern is a bullish confirmation signal that resembles a cup in the shape of ‘u’ and the handle in the shape of a downward sloping line. The pattern provides traders with ideal buy signals as it indicates that the market prices are going to rise further.
2. Rising range flags or ascending flags
The rising range flag is an uptrend confirmation pattern that signals a continuous incline in currency pair prices. The flag is identified in short downtrends and provides traders with ideal entry price levels. It is called the ‘range’ flag because the low and high prices of a currency pair trade in a wide range, signalling an uptrend confirmation.
3. Falling wedges
Falling wedges is a chart pattern that occurs in a market making lower highs and lower lows, signalling a bullish reversal. It provides traders with prices to long a trade with an expectation of the market prices increasing after a prior downtrend.
4. Descending channel
The descending channel pattern provides traders with information about the currency pair price action that occurs between two parallel downward sloping lines. It appears in a market with lower highs and lower lows. These patterns confirm an uptrend and provide traders with ideal entry price levels.
How to draw a flag pattern?
Both bearish and bullish flag patterns can be identified during strong uptrends and downtrends, respectively. Here are five steps on how you can draw a bull flag and bear flag pattern –
- Identify strong upward (or downward) sloping bars that are formed one after the other in a particular time frame.
- Identify candlesticks with smaller bodies right after the strong upward or downward bars.
- Wait for the market to go through a consolidation to identify a small but evident trend that moves in the opposite direction of the prior trend.
- When the trend reversal is confirmed, a bullish flag pattern can be drawn right after a downtrend, and a bearish flag pattern can be drawn right after an uptrend.
- The prior trend will be identified as the flag pole pattern. The reversed trend will be identified as the body of the flag.
How to trade the bearish and bullish flags in forex?
1. Spot a prior trend
Look for a prior downtrend to trade a bearish flag and a prior uptrend to trade a bullish flag. The prior trends confirm if the pattern is going to continue in the same market direction or not.
2. Identify a narrow price range
Wait for the currency pair prices to trade in a narrow range so you can successfully spot the support and resistance levels. Any movement below the support or above the resistance level will mark a trend continuation in that direction.
3. Buy or Sell at the breakout
A market breakout confirms that the trend is continuing in the direction of the breakout. Hence, when trading the bearish flag pattern, traders can exit the market at the closing candlestick’s price at the breakout level. However, when trading the bullish flag pattern, traders can enter the market at the opening candlestick’s price at the breakout level.
4. Place the stop-loss order
In a bearish flag pattern, stop-loss orders can be placed above the flag so that if and when the market moves below this level, the trade is automatically exited. In a bullish flag pattern, stop-loss orders can be placed below the flag so that if and when the market moves beyond this level, the trade is automatically entered.
5. Place take profit orders
In both bearish and bullish flag patterns, traders can place the take profit level at a distance equal to the distance between the top of the flag and its pole.
6. Monitor trades and act accordingly
The last step to trading a bearish or bullish flag pattern is to monitor the trades regularly and act accordingly. Even when you have placed an order, it is essential to keep analyzing the market and check if the pattern is reacting the same way it suggested. Doing this helps traders avoid false market signals.
Trade the flag patterns today to identify continued market trends
Both bear flags and bull flags are represented in the same way in the same chart pattern. They are reflected in the opposite direction marking a downward or an upward slope, respectively. Strategies followed by traders to profit from these projections are similar in nature but involves a superior understanding of these patterns.You can start trading these patterns along with several others on our platform and experience a smooth trading process.
