Bear Flag Chart Pattern Strategy

Today’s trading strategy is all about one of the most reliable continuation patterns the Bear flag pattern and our Bear flag chart pattern strategy will give you a framework to conquer the market trends.

Our team at Trading Strategy Guides is working hard to put together the most comprehensive guide on different chart pattern strategies. In order to understand the psychology of a chart pattern, please start here: Chart Pattern Trading Strategy step-by-step Guide.

One of the first experiences most traders learn when they start trading is price action trading and one of the most popular price action pattern that you probably have heard is the bear flag pattern.

The bearish flag is a very simple continuation pattern that develops after a strong bearish trend.

It doesn’t really matter if your preferred time frame is the 5-minute chart or if you prefer long-term chart because the bear flag pattern shows up with the same frequency on all time frames.

A continuation pattern, like the bearish flag, brings some good news because it tells you that after the market has gone down it will continue to go down even more.

In addition to that if you missed the initial sell off and the market has gone without you, if you spot the bear flag pattern on that chart, then this is a sign and a safe place to sell so you can enjoy the rest of the bearish trend.

We’re also going to provide you with a very clear step-by-step set of rules so you can trade the Bear Flag chart pattern strategy by yourself.

Now …

Moving forward, we’re going to discuss what makes a good bear flag pattern and highlight five basic trading rules to conquer the markets with the Bear Flag chart pattern strategy. You can also read the simple yet profitable strategy.

What is a Bear Flag Pattern?

A bear flag pattern is constructed by a descending trend or bearish trend followed by a pause in the trend or consolidation zone. The strong down move is also called the flagpole while the consolidation is also known as the flag.

Bear flag pattern

The bear flag pattern will always come after a strong move downwards and the strongest the move the biggest the profit potential can be.

As you can see in the figure below after the market had a strong down move it enters into consolidation – a very narrow range – to adjust to the new lower prices.

bear flag chart pattern strategy

Note* For a valid bearish flag the support and resistance lines forming the flag needs to be parallel and often will be sloping upwards.

The bearish flag pattern has some similarities with the Rectangle Chart Pattern but the difference is that within the rectangle pattern the price action is moving horizontally in a much bigger trading range.

The Psychology behind Bear Flag Pattern

The bear flag pattern highlights a trading environment where the supply and demand balance has shifted badly in one direction of the market (supply > demand). This in turn will produce very little upside retracement which is allows the flag structure to take shape.

bearish flag

After the initial sell off, people who missed the train will panic and begin selling and more people selling it during the flagpole stage.

During the pause or the narrow consolidation people will now wait to get higher price so they can sell but since the supply demand equation is so imbalanced this won’t happen and we get another smash that will make many people to chase again the move to the downside.

Now, let’s see how you can effectively trade with the Rectangle chart pattern strategy and how to make profits from basically using naked charts. You can also read about trailing stop or hard take profit for better trading.

Bear Flag Pattern Strategy – Sell Rules

Now that you’re familiar with the bearish flag formation, let’s walk through an easy step-by-step guide that will frame for you an easy trading strategy to skim the markets.

The best thing about the bear flag pattern is that there’s a very easy way of knowing how low it will send the currency price.

We’ve done something slightly different with the Bear flag chart pattern strategy and we’re going to teach you a new way on how to trade the bearish flag.

Now is the time to go through the bear flag chart pattern strategy step-by-step guide:

Step #1: Look for evidences of a prior bearish trend. For a valid bearish flag you need to see a sharp decline.

Just because you can spot the bear flag pattern it doesn’t mean you have to jump straight into the market and trade it.

Remember, we need the right context and the right price structure needs to line up for a tradable bearish flag.

bearish flag

So, the first step is to identify the market trend prior to the flag price formation.

A valid bearish flag first needs a sharp decline which is a strong evidence of a bearish trend and the fact that the supply and demand are out of balance.

Note* The sharp move is also the Flagpole – the first element of the bearish flag structure.

Step #2: Identify the Flag price formation. The price action needs to move in a narrow range between two parallel lines.

The flag price formation is the second element of the bear flag pattern.

Basically, all you need to do is to spot one support and one resistance level that must contain the price action in a very narrow range.

The narrow range is key for the bear flag pattern success rate.

Down leg using a bearish flag

So far, so good.

Now, we need to determine an entry technique for our bear flag pattern strategy.

See below:

Step #3: Sell at the closing candle that generates the Flag Breakout.

After we identify the market trend, and the characteristics of a good bearish flag pattern we need to wait for confirmation that the trend is about to resume.

There are two basic approaches to enter the market with the bear flag pattern. Aggressive traders will enter at the top of the bearish flag as this will secure a little bit of bigger profits.

If you’re a conservative trader you can wait for confirmation provided by the flag breakout.

bear flag definition

Our team at TSG prefers to take the conservative approach and wait for a break and close below the bearish flag before executing the trade.

The bear Flag chart pattern strategy only looks for trading opportunities when you get a breakout below the flag price structure to be a seller.

The next important thing we need to establish is where to place your protective stop loss.

It is important when looking at this type of strategy to keep everything in context of the overall market. Too many traders will try to zoom on

See below…

Step #4: Place the protective stop loss slightly above the Flag.

The Rectangle chart pattern strategy gives you a simple way to quantify risk because you can place your protective stop loss slightly above the flag price structure.

We’re accomplishing two things with our tight stop loss:

  1. Small losses.
  2. Higher risk to reward ratio.

down price move

With such a tight stop loss you’ll have the comfort of losing many trades in a row because with the amazing RR the bearish flag can potentially wipe out all your losses in a single trade and still come profitable.

The next logical thing we need to establish for the bear flag pattern strategy is where to take profits.

See below…

Step #5: Take Profit target equals the same price distance of the Flag pole measured down from the top of the  bearish flag.

The text book profit target is the height of the flag pole measured down from the top of the flag.

Our team at TSG has learned that the market likes this kind of price symmetries and we like to take advantage of it.

flat top breakout

Note*** The above was an example of a SELL trade… Use the same rules – but in reverse – for a BUY trade, but this time we’re going to use the bullish flag. In the figure below, you can see an actual BUY trade example, using the bullish flag pattern.

what is a bear flag

Click here for more information

Conclusion

Identifying the bear flag pattern should be an easy job but if you have the right trading conditions the bearish flag can be a great trading pattern to start growing your account. The key thing about the bear flag chart pattern strategy is that it’s a strategy that works only in a bear market and it work beautiful.

Please also don’t forget to check out our previous strategy tutorial on Rectangle Pattern.

Thank you for reading!

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PS: Make sure to continue checking out TSG website for further educational Chart Pattern strategies.


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