If you use technical analysis and indicators for safe and profitable trading, the bullish flag pattern is the instrument you would certainly love to have in your arsenal. The bullish flag is generally associated with explosive moves. As a result, the pattern can provide exceptional trading opportunities although the strategy can also be a bit risky. It all depends on the trader's skills, experience, and additional tools to use.
In this article, we will show you what a bullish pattern is. We will discuss simple ways to identify it as well as use together with your bullish trading tactics.
Bullish flag pattern explained
What is a bullish flag? The term indicates that the pattern refers to the asset price in the uptrend. When we say uptrend, we mean a very strong one. The pattern got the name "bullish flag" because it actually looks like a flag once you have managed to identify it on a trading chart.
To understand how the bullish flag works, here are some baseline features that will make things clearer:
- The pole is formed when a stock makes a powerful move upwards featuring a high relative volume.
- The flag is formed when a stock consolidates on the pole top featuring a bit lighter volume.
- The stock continues the trend breaking out form consolidation getting back to a higher relative volume.
Judging by the issues above, it becomes clear that the pattern mainly refers to the momentum trading strategy. The good news is that traders can implement it within any period. For example, some momentum traders tend to use the bullish flag within a 2 or 5-minute timeframe as the best option to scalp the movement of the stock price.
Swing traders may also benefit from the bullish flag pattern and use it on their daily trading charts as well.
Steps to identify a bullish flag pattern
Some beginners may find it hard to identify the pattern on a trading chart. The key challenge here is the fact that a bullish flag consists of several baseline components. To have profitable trading with the pattern, you will have to correctly identify each of the components. What's more, you need to understand their nature.
So, to succeed in trading with a bullish flag, a trader needs to keep an eye on the following:
- A flag pole also is known as the preceding uptrend.
- The bull flag itself.
- The retracement depth. As a rule, it should never go deeper than 38% of the original trend. If you see it going down to 50% or more, it is not a bullish flag pattern.
- The flag breakout.
- The higher price that has the same length and the size of the flag pole.
Once you have learned to identify each of the above-mentioned components, you are ready to use a bullish flag in your trading strategy.
Ways to trade with a bullish flag pattern
While identifying the pattern might seem a bit complicated, trading is much simpler even for newbies. A good idea is to use different trading software and tools such as scanners. They can be free or paid. It does not matter, as the algorithm is always the same.
What you need is to keep an eye on the volume of the surging stock. It is the main factor that confirms the majority of moves. Besides, it may signalize the breakout to bring success.
Another important issue to look for is the descending line that you are able to track until the breakout point has been reached. It forms the top of your future bullish flag. The line can be clearly defined, as you will see it above the pattern connecting other moves that were rejected after it eventually jumped through the price.
Despite the fact the pattern can have a statistical edge, you will need to take care of yourself. It means the need to identify the best exit points to get out. So, it is a trader's responsibility to identify points on the chart where the setup will work no more.
You may use two different ways to handle this kind of trading tactics:
- The first one is to place a stop loss below the area where the asset stock consolidates.
- The second way is to opt for a 20-day moving average and use it as another method to place a stop loss. The position will be closed once the price has approached below that moving average.
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Is bullish flag pattern safe to trade?
Any strategy can become profitable or risky, depending on the trader's approach. The only way to succeed when trading with a bullish flag pattern is to identify each of its components. When you have all of them presented in the chart, the strategy is not only safe but also profitable.
- God for all assets and types of financial markets.
- Makes it easy to identify entry and limit levels.
- Newbies may find it a bit complex.
Oh, and one more thing to consider. The bullish flag comes with good risk-reward ratios.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.