At Trading Strategy Guides we really love the idea of having different chart patterns, whether is advance price patterns or simpler ones that pretty much everyone has heard of like what we’re going to talk in this article namely the bullish flag pattern. The bullish flag pattern itself is essentially just a continuation pattern; it’s just sort of representing a pause or a pullback in the market after a stronger move.
The main reason why we feel this is the best Flag pattern strategy is that you’ll not be forced to catch tops or bottoms, which is like catching a falling knife. However, our team at Trading Strategy Guides has developed a more conservative approach to spot tops and bottoms by using the following reversal trading strategy: Parabolic SAR Moving Average Trading Strategy.
The Flag Trading Pattern is one of the easiest to help you build your trading skills.
We have to answer to an important question: what technical indicators do the best Flag pattern strategy needs?
Well, the simplest answer is NONE.
The bullish flag pattern is in itself a pure price action pattern that doesn’t require the use of any technical indicator.
Before we start covering in depth how to trade bullish flag pattern don’t forget to take notes because writing down the steps of the best Flag pattern strategy will cement the bullish flag pattern rules in your mind.
Bullish Flag Pattern Explained
The bullish flag pattern is a powerful technical pattern that can develop from the lowest time frame possible (1-minute TF) all the way up to the monthly chart. More, the bullish flag pattern is a universal pattern that can show up in all markets.
It’s not a coincidence that the bullish flag pattern resembles a national flag after all; the bullish flag name was inspired by the similarities with the national flag.
The bullish flag pattern is constructed in two parts:
- A strong and sustained rally.
- Followed by a tight range that slowly drifts lower to form the flag portion of the bullish flag pattern. Another characteristic of this tight range is that it should be contained within two parallel lines.
If you’re still confused then please have a look at the chart below:
Not only that the bullish flag pattern is a very simple technical indicator, but it can lead to moves that are of the same magnitude as the flag pole movement. In the next section, you’ll learn how to trade bullish flag pattern and how one should trade the best flag pattern strategy.
How to Trade Bullish Flag Pattern
How to trade the bullish Flag pattern is as simple as the bullish flag pattern itself. Since this is a continuation pattern we want to trade in the direction of the prevailing trend. So, as the name suggests – bullish Flag pattern – we should expect a bullish move to come out of this pattern.
In this case, we want to enter when we break above the upper flag “border” or above the top of the flag pole.
Again, remember this is a continuation pattern.
If you’re just getting used to the bullish flag pattern, just zoom out a little bit on your chart because it can make a really big difference. Zooming out your charts you will be able to spot the bullish flag pattern much faster.
Let’s now get straight into the buying rules for the best Flag pattern strategy.
The Best Flag Pattern Strategy
Step #1: Zoom out Your Charts and Mark on the Consolidation Zone – The Flag – of the Bullish Flag Pattern
We recommend all the time to play with the charts and zoom out so you can better identify the bullish flag pattern. Following this step, it will also make it visually a little bit easier to plan your next move.
This step is quite important to be done, otherwise, you won’t be able to identify when the next movement will happen.
Most trading platforms come with a technical tool that can help you draw a parallel channel and highlight the flag pattern. On the TradingView platform, our preferred trading platform, the channel tool is located on the right hand-side panel:
Next, we need to figure out where we need to get into the trade, which brings us to the next step of the best Flag pattern strategy.
Step #2 Enter Long Position at the Break of the Flag Pattern
We have got a really solid looking bullish flag pattern here that follows exactly the rules highlighted in the Bullish Flag Pattern Explained. So, now we can safely enter at the immediate breakout above the flag.
Note* You can now safely zoom in so you can better manage your trades as we already identified the bullish flag pattern.
Alternatively, you can wait for a breakout and only enter after a pullback that retests the flag. This is a more conservative approach. However, there is a big risk with this type of chart patterns that you won’t see any pullback once the breakout happens.
In our example, we would have missed a great opportunity if we would have waited for a pullback to enter a trade. Most of the time we’re going to get a really big volume burst out the moment the breakout happens, which will make it harder for a pullback to develop.
You’re right if you think this looks more or less like a breakout strategy and if you want to learn some tips and tricks on how professional traders use breakout strategies please read our insights here: Breakout Trading Strategy Used by Professional Traders.
Now that we’re in a trade we need to find our target, which brings us to the next step of the best Flag pattern strategy.
Step #3 Take Profit Once the Price Travels the same Distance in Price it did in the Flag Pole.
Now that we’re in a trade we need to establish our profit targets. The way we’re going to find our profit target is quite intuitive. First, we measure the distance the price traveled from the starting point of the bullish flag pattern to the flag and project that move to the upside.
TradingView comes with a very handy tool called “Measure” which will allow you to quickly measure how big the Flag pole was:
Alternatively, if you’re an MT4 trader, if you don’t want to count on hand, you can simply use the Fibonacci indicator and set your target at the 100% Fibonacci ratio.
We can see that we have a good profit target of approximately 262 pips and if we measure the same amount from the breakout point and project it to the upside we get our profit target.
Now that we have a good understanding of where to take profits, there is still one more thing left that we need to take care of, which brings to the next step of the best Flag pattern strategy.
Step #4 Place the Protective Stop Loss below the Flag
The protective stop loss is generally placed below the lower Flag “boarder” or below the bottom of the consolidation zone. A break below the flag will automatically invalidate the bullish flag pattern structure. This is quite obvious because the flag structure won’t look any more like a flag.
Note** The above was an example of a buy trade… For a sell trade we need to trade the “cousin” pattern of a bullish flag pattern which is the Bearish flag pattern. Use the same rules – but in reverse – for a sell trade.
Bearish Flag Pattern – USD/JPY
You should now know how to trade bullish flag pattern like a professional trader. This is a very simple price pattern if not one of the simple pattern you’ll ever encounter, but the bullish flag pattern is one of the most powerful technical patterns out there.
When you’re able to tighten your stop loss at the levels the bullish flag pattern allows you to do you know you’re on the right path. But, not only that, your profit potential is multiple return of your risk. In essence, you risk a little to gain a lot more which is the thing that most traders should strive for.
Before you sign out, make sure you also read our 2 Keys to Success to further enhance your trading experience.
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