Bull Flag Pattern Trading – Profit In A Bullish Market

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A bull flag pattern is a bullish continuation pattern used in technical analysis that occurs in a market that is in an uptrend.

You can look for bull flags in the following manner:

  1. Look for an impulse move (the pole of the flag) in price to the upside during an uptrend
  2. Wait for the market to pullback in price (forms the flag)
  3. Find a way to trigger into a resolution of price as it begins to move back to the upside

There are so many chart patterns including bear flags and pennants that I call all types, consolidation patterns.

Why?

For the most part, I am not going to trade each chart pattern too differently.

I look at them as pauses in current price direction and am looking to get involved either prior to the resolution or just as it is started.

Lesson? 

  • Don’t get caught up in trying to be an expert at identifying chart patterns.
  • Flag formations and other patterns can take on many different appearances
  • A rough idea of what you are looking at and the bias is generally good enough.

I will get to how to trade the bull flag later but first, let’s take a look at what a bull flag chart pattern looks like.

Bull Flag Chart Example
Bull Flag Chart Example

Pretty simple.

You can identify bull flags all over your charts but do you want to trade all of them?  How do you trade flags?  Where does your stop loss go?

First, let’s talk about bull flags mean.

 

What Does A Bull Flag Pattern Mean To Traders?

When we see a market in a strong trend to the upside, we need to find ways to enter that trend to make some money.

What a bullish flag means, is opportunity.

For whatever reason, and it could be profit taking or at the extreme end of it, the beginning of a trend change, prices take a break from the upwards advance.

It is a pause in the action and there is no better time to get on a train than when it takes a pause.

Does it mean the market is weak?  Not necessarily.  Only so much buying takes place before price gets to a price that is a little rich for some traders.

These traders will wait for a bull flag to form and since it is a continuation pattern, will look to buy at slightly cheaper prices and get on the move higher.

 

Continuation or Reversal Pattern – Keep It Simple

Let’s not get bogged down in the details of each pattern.

Either they are a continuation pattern like the bull flag and bear flag, or they are reversal patterns like the head and shoulders.

You don’t need 10 different trading tactics if you are trading 10 different price patterns.

 

But Wait!  I Read That Bull Flags Are Different Than A Regular Pullback

Not really.  Some will say that a bull flag needs small bars and that is not like a regular pullback.

Wrong.

We never want to see momentum in a corrective move regardless of any chart pattern we are looking at.

Actually, a pullback (flag) fails when we see momentum come into the market.  Where we want to see conviction in the move is the leg up in price, not during the retrace.

If you do see momentum during the correction, you are going to trade the approach you use in trading that market.

The point is, no pattern will look perfect and much like clouds in the sky, you may see a figure that I don’t see.

Bottom line:  Keep It Simple

How To Trade The Bull Flag Pattern

Before you start looking for bull flags to trade, find an instrument that has some sort of trend to it.

Even if current prices are in a trading range, you can keep those on the watch list because ranges give you several strategies to use to trade.

Let’s keep it simple and walk through the steps to trading the bull flag and let’s use the stock of Salesforce for this example.

Bull Flag - Stock Chart - Moving Average
Bull Flag – Stock Chart – Moving Average

I have added the 20 period simple moving average which you could use for trend – although price action of higher highs and lows is another way.

The purpose of the moving average is, as I have written before, to give you an area to look for your pullbacks to cease.  No magic here.

Framework For A Bull Flag Trading Strategy

  1. Is price in an uptrend and does the impulse move look strong? Yes.
  2. Wait until you can identify a bull flag and price trends down to the average.  Done.
  3. Look for your trade entry at the conclusion of the bull flag and in the zone of previous price structure

Entry Trigger

I don’t want you just jumping into a bull flag when you think it has ended.  You need some type of entry trigger to get you into any trade.

So what can we look for?

On the chart, you can can see trend lines being drawn and you can enter the trade at the break or close above the trend line.

I prefer looking for a more pure price action trigger and sometimes we may use a four hour chart to dig into the bars or candlesticks.

Trade Entries For Bull Flags
Trade Entries For Bull Flags

Here are two obvious trade triggers you can use:

  1. This candle shows serious momentum as it wipes out the previous two day decline
  2. Sellers could not push price past the former resistance zone.  Buy stop at highs
  3. Not shown on this chart but take a look at my failure test article that shows my top choice for triggers
  4. Also not shown, if the flag is shallow, consider the breakout point at the high of the flag for a trade trigger

What About Your Stop Loss When Trading Bull Flags?

What do you see in a pullback?  You see price descending on an angle which can be tough to find a place to put your stop.

Some will say just put it below the candle you enter on and while that is simple, it is probably not very effective.  We won’t always pick the bottom of a price move so we need to keep that in mind.

Using the price action triggers does give you a higher probability of continuation but price can still fall back.  Consider using an ATR from entry which takes into account the market volatility which is important to keep you out of the noise.

When To Take Profits

Profit taking is a touchy subject for people.

  • You don’t want to get out too early and leave profits on the table.
  • You don’t want to overstay your welcome and watch profits evaporate during another flag

We never know when a trade is going to go bad or how far it will run.  Trailing stops are a time tested favorite for many traders looking for bigger returns.

Some traders will measure the pole of the flag and project that from the low of the decline.

When To Take Profits
When To Take Profits

This is a daily Forex chart and you can see the bull flag that pulled back into the 20 SMA along with price structure to the left.

Imagine you enter that trade.

  • You take the measurement of A-B (the pole) and
  • Project it from C (the low of the flag)
  • Giving you an area around D.

It is a zone you are looking for and not an exact price.

 

Want To Trade Bear Flags?

Just reverse everything we have talked about so far.  The main difference is we are looking for a market that is in a down trend.

 

Can Bull Flags Work In Day Trading?

The formation of the flag is a repeatable pattern in any liquid market and on every time frame.  If day trading for a living is your goal, you can implement trading the flag after you test it and work out your trading plan.

 

What Is A Bull Flag Breakout Pattern?

Markets consolidate and trend so having a way to get into trades between the transition is good for the toolbox.

There are two things I want to cover:  trading prior to the breakout and after the breakout using bull flags.

Markets will eventually breakout into a trend, we just never know when.  But there are some clues we can use to have us on alert of a breakout coming.

Flags Inside Trading Ranges
Flags Inside Trading Ranges

This graphic is a range in an uptrend so we are looking for upside breakouts and trades.

  • Price ranges between support and resistance zones
  • Small candlesticks begin to base just below resistance – this is a bullish sign as sellers are unable to drive price lower as previous candles show
  • Low volatility pullback begins and you use your entry tactics to get involved at the end of the pullback and before the range breakout.

What is you miss this pullback or it does not occur?

Look for the same thing after the breakout occurs.

Breakout - Pullback
Breakout – Pullback

 

Bulls Flags Are Easy To Trade – Not Really

These look easy to trade and while they are a basic price pattern, there is a little bit of discretion and skill needed to be successful.

Bull flags (virtually any chart pattern) are not always perfectly formed and you may only see a hint of a possibility of one forming.  This is why I don’t get caught up in the textbook definition of any patterns.

Setting your stop loss is not as simple as placing it below a horizontal flag or the pullback variant.  Quick flushes of price are common as well as an extended pullback that will tick you out before price reverses.

The issue of stop is why I prefer using the average true range along with price structure.

Entering a trade through the bull flag setup can be as simple as trading the first break of the previous candlestick high.  It can also be more intricate by looking for a pattern within a pattern or by using a lower time frame.

But the bull flag is a normal move of any market which makes it an excellent addition to or a stand alone trading strategy.

price action pattern pdf

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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