Bearish Flag Pattern
A bearish flag is a candlestick chart pattern that signals the extension of a downtrend after a temporary pause. As a continuation pattern, the bear flag helps sellers further reduce the price action.
After a strong downtrend, price action converges into two parallel trend lines in the opposite direction of the downtrend. Once the supporting trend line is broken, the bear flag pattern is activated as the price action continues to decline.
In this weblog put up we study what a endure flag is, its structure, in addition to its principal strengths and weaknesses. Furthermore, we will also share a simple trading strategy to show you how to trade the bear flag and make a profit.
What is a Bearish Flag Pattern?
In the case of a bull flag, its bearish part consists of a flag and a flag. The former is established after price action trades in a lower trend, making a lower high and a lower low.
Once a new low is reached, price action resumes as sellers breathe a sigh of relief. This consolidation takes place in a parallel channel, unlike bearish pennants where consolidation is formatted into wedges or triangles.
Buyers use consolidation to weaken the momentum of sellers, which controls price action. On the other hand, bears take a step back to consolidate the most recent gains and prepare for another blowout.
This integration phase should not extend too far. Depending on the strength of the downtrend, the rebound can be sharp or mild. In general, the rebound should not rise above the 50% Fibonacci retracement of the flagpole.
In the textbook example, the pullback should end at about the 38.2% Fibonacci retracement. The shorter the rebound, the stronger the downtrend, and the stronger the breakout.
Strengths and Weaknesses
As mentioned earlier, the bear flag is a continuation pattern that facilitates a downward extension. As a chart pattern, the bear flag ensures that traders are able to identify which phase is currently in a downtrend.
More precisely, the flag will tell us whether the consolidation phase has ended as sellers’ pressure has increased. Breakout provides us with precisely defined levels to play with, as you’ll see in the example below.
In general, the bear flag is considered a strong technical pattern. This was especially the case when the retracement ended around 38.2%, growing a textbook endure flag pattern. Therefore, its biggest advantage is that it offers a very attractive risk-reward ratio, as the levels are clearly defined.
A clear weakness is that a consolidation phase can cause the trend to change direction. As consolidation progresses, sellers may lose momentum, while buyers may gain confidence that the current phase is not consolidation, but rather the opposite.
Therefore, it is advised not to trade flags with long and short consolidation phases as well as flags with more than 50% expansion.
Spotting the Bear Flag Chart Pattern
As mentioned earlier, a bear flag is a bearish continuation pattern. The first step to identifying a bear flag is to find a downtrend. Next, the rebound should occur in the ascending channel, when we observe the degree of correction.
EUR/USD has been declining in an aggressive downtrend before starting a mild rebound, which is short-lived due to overall strength as the initial move declines. However, the price action converged into two parallel lines before the bears regained control.
In this case, the rebound did not even manage to extend to the first Fibonacci retracement level of 23.6% before sellers managed to reduce the action. Therefore, the overall downtrend usually determines the strength and speed of the rebound.
Trading the Bear Flag
The process of trading that bearish flag is based on the same principles that we apply when we trade other candlestick patterns. Once we see the flag, we wait and watch to see if there will be a break of the supporting trend line.
Many traders are too eager to enter the market and often “jump the gun” before an actual breakout occurs. Therefore, remember that the pattern becomes “live” only after the breakout.In our example, we’re supplied with each popular access alternatives after the breakout. The trade starts as soon as the breakout candle closes below the first option result flag.
On the other hand, we can choose to wait for the eventual throwback, when the price action returns to the “criminal scene” to retest the broken channel. This option provides a better risk-reward since entry is at a higher price. In contrast, the first option means that you cannot miss the trade because there is no guarantee that the throwback will happen at all.
We choose option number 1 to ensure that we are in the trade. Therefore, a sell trade is made after the breakout candle closes comfortably below the lower trend line. The stop loss is about 20 pips higher than the entry and channel region.As with the bull flag, a smooth pass to the internal of the flag invalidates the undergo flag pattern.
The gain level is calculated by measuring the distance between the flagpoles.The fashion line is then copy-pasted, beginning from the factor wherein the breakout occurred, with theend point indicating a level where, should an opportunity arise, we should consider booking our profit.
Finally, our take-profit order is hit, resulting in a profit of about 85 pips. Once compared to the relative risk of 20 pips, this makes for a very attractive R:R ratio. If we had chosen the second option, we would have gained 5 pips more and risked the same amount of pips less.
Significance of the Bearish Flag Pattern
The Bearish Flag Pattern holds significance for traders and investors for several reasons:
- It provides a clear signal to anticipate a continuation of the downtrend.
- Traders can use this pattern to set profit targets and stop-loss orders.
- It offers a structured approach to trading within a larger bearish market context.