Using technical analysis while trading in financial markets is crucial for your strategy. In this article we show you ins and out of bear and bull flag patterns and how to use them in trading.
A strong continuation pattern that represents a brief pause in an uptrend. The formation resembles a flag on a pole where the pole forms following a sharp rise in the asset price. The flag can be a horizontal rectangle or a descending channel that represents a consolidation in price and a reduction in volume. When volume begins to rise, traders can expect a sharp price breakout resembling the length of the previous mast.
The psychology behind the formation of the Bull Flag is that after a strong rally, the bears step in to try to drive the price down, but are squeezed out of position by the bulls. The price then rises rapidly and the upward trend continues.
A bear flag pattern is the same formation just reversed and is a powerful signal for a continuation of a downtrend.
Mark the low and high of the uptrend (mast) and identify the upper and lower boundaries of the consolidation channel (flag).
If the price retracement is above 50% of the mast, then the formation may not be a flag.
Keep an eye on the volume. If volume is rising rapidly, enter a long position either at the bottom of the flag or at the top of the flag in anticipation of a breakout.
The break must be similar to the length of the previous mast.
Bullish pennants are continuation patterns very similar to bullish flags. The difference being that the consolidation period looks like a pennant or triangle at the end of the mast, not a rectangular channel (Bull Flag).
A bearish pennant is the same formation just reversed and is a powerful signal for a continuation of a downtrend.
You can trade bullish and bearish pennants in the same way as flag patterns. Conservative traders should wait for confirmation of the direction of the breakout first, as it could go either way.
The falling wedge is a bullish chart pattern formed by two converging downward sloping trend lines. The two trend lines slant at different angles giving the appearance of a wedge. Bears begin to lose momentum as bulls step in to slow the pace of price decline. The formation occurs during a downtrend and is usually a strong indication of an uptrend reversal.
The opposite of the Falling Wedge is a Rising Wedge which is typically seen in downtrends.
Identify the downtrend by marking the lower highs and lower lows with trend lines.
Keep an eye on the volume. If volume is rising rapidly, enter a long position in anticipation of a breakout or wait for confirmation of the breakout.
Place your stop loss and profit targets based on previous resistance levels or based on your own risk/reward ratio.
Unfortunately, there is no trading crystal ball or foolproof way to predict the market 100% of the time. Fortunately, as traders, our job is not to be right all the time. We just have to be right more often than not and not lose more than we win. We do this by using technical analysis to read charts and strict trade management.
The market reflects human nature. We are creatures of habit so the market is a creature of repetition. Learning to spot these repeating patterns can help traders understand market sentiment and see potential breakouts.