The bear flag pattern is a popular price pattern used by technical traders within the financial markets to determine trend continuations. This article will explore bear flag trading opportunities and will cover:
- Definition of a bear flag pattern
- How to identify a bearish flag on forex charts
- Bear flag trading strategy
- Reliability of the pattern
- Bear flag vs. bull flag
WHAT IS A BEAR FLAG?
A bear flag is a technical pattern that provides an extension/continuation to an existing downward trend. The bear flag formation is underlined from an initial directional solid move down, followed by a consolidation channel in an upwards direction (see image below). The decisive action down is the ‘flagpole’ while the consolidation is the ‘flag’ itself.
Bear flag pattern
This illustrates that there is still selling pressure present, although traders are also entering long positions looking for a reversal, which forces the price to drift upwards.
During the consolidation, traders should be prepared to take action should price break down through the lower range level and make a new low as this indicates the bears are in control again to force another sell-off.
When the lower trendline breaks, it triggers panic sellers as the downtrend resumes another leg down.
The success of a bear flag can be more tremendous after a significant downside move due to the possible increase of overhead resistance.
Bear flags can be more robust when the swing low that begins the pattern is also an all-time low due to the possible lack of underlying support.
The bull flag is an upside-down version of the bear flag.
BEAR FLAG VS BULL FLAG
The bear flag and bull flag represent the same chart pattern. However, they are reflected in the opposite direction. Both bull and bear flag patterns entail a flagpole, consolidating price channel, and a take profit projection measured from the length of the initial flagpole. Strategies for trading forex with bear and bull flags entail similar steps, but it is essential to understand the bull flag pattern in its layout as these patterns can be easily confused when taken out of context.