A bull flag is a continuation pattern that occurs as a brief pause in the trend following a strong price move higher. The bull flag chart pattern looks like a downward sloping channel/rectangle denoted by two parallel trendlines against the preceding movement.
The flagpole forms on an almost vertical price spike as sellers get blindsided by the buyers, then a pullback with parallel upper and lower trendlines forms the flag.
The initial rally ends through some profit-taking, and the price forms a tight range making slightly lower lows and lower highs.
Eventually, the price peaks and forms an orderly pullback where the highs and lows are parallel, forming a tilted rectangle.
This illustrates that there is still support in the market, although the unwinding of some prominent long positions and traders entering short positions looking for a reversal forces the price to drift downwards.
During the consolidation, traders should be prepared to take action should price break up through the upper range level and make a new high as this indicates the bulls are in control again to push another rally.
Upper and lower trendlines are plotted to reflect the parallel diagonal nature.
The breakout forms when the upper resistance trend line breaks again as prices surge back towards the high of the formation and explode through to trigger another breakout and uptrend move.
The sharper the spike on the flagpole, the more influential the bull flag can be.
The bear flag is an upside-down version of the bull flag.