If you’re curious about the price trend in crypto and its potential direction, then studying technical analysis’ most-referred patterns–flags–is a great place to start. In this article, we will offer an overview of trading bull and bear flags; keep reading for more information!
According to technical analysis, a flag pattern denotes short-term market movements within an ordinary parallelogram that is contrary to the prior long haul direction. Conventional analysts tend to consider flags as prospective continuer of trends in the future.
When it comes to flag patterns, two options exist for traders – bull flags and bear flags. Although their conclusions vary, both banners boast five key components: a formidable preceding trend (flagpole or pole), the gathering channel (the pennant itself), a trading volume pattern, an explosion out of the range and lastly confirmation that prices are continuing in the same direction as previously observed.
After an impressive uptrend, the bull flag pattern is formed when prices stabilize within a downward-sloping channel. This channel consists of two parallel lines that may converge to form a wedge or pennant. Trading volume usually diminishes during this time as traders associated with the previous trend have less need to buy or sell while consolidation is taking place.
When the price breaks above the bull flag’s upper trendline, causing an abundance of ‘FOMO’ (fear of missing out) amongst investors both old and new, typically trading volumes increase. As a result, analysts deem strong volumes as confirmation that the bull flag breakout is successful. Conversely, if there are no significant increases in volume when this occurs it generally suggests that a fakeout may happen – meaning the price could drop below its previous peak again invalidating any potential bullish movement.
Traders have the option of placing a long position at the base of a bull flag if they anticipate that the next move upwards toward its upper trendline will cause it to break out. Less adventurous traders may choose to wait for confirmation before entering this type of trade. If your prediction is correct, you can expect an increase in price which should be equal to the length of the flagpole as measured from underneath its bottom edge.
As a word of warning, traders should remain vigilant and set their stop loss just beneath the entry point to minimize any potential losses if the bull flag fails.
The appearance of the bear flag pattern is marked by a notable decrease in trading volumes as the “flagpole” drops initially and then moves horizontally within a parallel channel. This uptrend inside of this same range is referred to as the “bear flag.” As traders watch these patterns emerge, they have an opportunity for potential profits when prices break out from underneath the lower boundary.
As seen in the Bitcoin chart above, a flagpole pattern followed by an upward retracement inside a rising parallel channel can be observed. Ultimately, BTC price breaches outside of the channel range to the downside and decreases considerably, equating to approximately as much as what was gained during its preceding mark-up.
Traders can choose to open a short position on the downward retracement of the flag’s higher trendline or wait until the price plunges below its lower boundary with mounting trading volumes.
Generally, the short distance is calculated by subtracting the flag’s height from that of the pole.
If we observe a break down below the flag’s lower trendline with low trading volumes, this could be an indication of a fakeout. This may mean that the price will reclaim its previous lower trendline as support in order to rebound and stay within its parallel channel.
To safeguard your investments during a fakeout situation, it is essential to set up a stop loss just above the entry point.
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