A bull flag is a bullish chart pattern formed by two rallies separated by a brief consolidating retracement period.
The flagpole forms an almost vertical price spike as sellers get blindsided by the buyers, then a pullback that has parallel upper and lower trendlines, which form the flag.
The initial rally comes to an end 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 to each other, forming a tilted rectangle.
This illustrates that there is still support in the market although the unwinding of some large long positions and traders entering short positions looking for a reversal forces the price to drift in a downward direction.
During the consolidation, traders should be prepared to take action should price break up through the upper range level and/or 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 powerful the bull flag can be.
The bear flag is an upside-down version of the bull flag.
FAQs
A flag is a pattern in price movements analyzed in technical analysis. It occurs over shorter periods and goes against the main price trend observed over longer periods on a price chart. It’s called a flag because it looks like a flag on top of a flagpole.
A bear flag pattern is the opposite of a bull flag pattern. It appears on a candlestick chart as a downward trend with more trading activity, followed by a brief upward pause with less trading activity, before the downward trend continues.
Flag patterns are seen as highly dependable continuation patterns used by traders because they offer a way to join an ongoing trend that’s set to persist. When flag formations emerge, they often look alike and appear in similar circumstances within an existing trend.
When a bull flag is correct, it indicates that the current upward trend, known as a bull trend, will keep going, and the price will likely increase once the pattern finishes.