If you’re going to trade crypto, it’s a good idea to start by learning to recognise trends, signals and patterns. This will give you a better understanding of the psychology behind what makes investors make their decisions which, in short, is what makes the markets move. One of the most notable candlestick chart patterns is the bull flag. In this article, we’re going to go over how to identify a bull flag and also how to trade one. We’re going to assume that you already know and understand how to read a candlestick chart.
What is a Bull Flag?
A bullish flag pattern (or Bull Flag) is formed when there is a period of upward movement before a spell of consolidation. The term comes from the fact that the vertical rise in the price resembles a flag pole and the consolidation, where the price ranges between two well defined levels, looks like the flag itself. The underlying psychology behind the bull flag pattern it’s what’s important here, not so much its shape. The flag pole can be formed either by a single candle or a handful formed over 3 or 4 days. The consolidation pattern which forms the flag can be rectangular but often, the flag has a slight downward angle. It should be noted that there is evidence to suggest that a tighter flag (i.e. the narrower the field of consolidation) will often perform best.
What does a Bull Flag mean?
The flag pole, formed by a sudden surge in the price of an asset, followed by the flag, an area of consolidation shows that despite a strong rally, the price has been held up and refuses to drop. Traders and investors see this as a good opportunity to get in and do exactly that. The result of a bull flag forming is that the price will typically rally again, more aggressively, measuring the length of the prior flag pole. The most effective way to decide when to enter a trade is to wait until the price breaks out of the top of the consolidation range and then go long. It’s always best practice to trade with caution but it should be noted that a bull flag is among the most reliable candlestick chart patterns.
So, is there such thing as a Bear Flag?
Yes. A bear flag is the exact opposite of a bull flag and should be taken with equal importance. The bear flag’s pole is formed by a sharp drop in an asset’s value followed by an area of consolidation, the flag. The flag itself often doesn’t angle downwards in this situation as it can with a bull flag. A bear flag suggests that the price will drop by the same amount as the initial decrease in the asset’s value.
Knowing how to spot and how to trade a bull flag is highly recommended if you want to up your trading game. Being very easy to recognise along with the fact that it’s among the most accurate and reliable patterns makes it the one to watch out for. To make things even more exciting, we’re given a recommended exit price, defined by the size of the move which formed the initial flag pole. It’s also well worth looking out for bear flags, too, so you know that it’s a time not to trade.