- ByScott Geekie
- June 28, 2022
- 10:40 am
- Technical Analysis
Table of Contents
Bull Flags and Bear Flags are continuation price chart patterns in technical analysis that allow traders to forecast the direction of the trend after the price has consolidated. Depending on the underlying trend, Flags can be Bearish and Bullish.
Bear Flags and Bull Flags are best used in a trending market. By using these continuation patterns, you can take advantage of these opportunities to trade in the direction of the bigger trend.
There are multiple ways of trading Bull and Bear Flag Patterns, but from my experience, you can get the highest probability trades and highest Risk to Reward when combined with Smart Money Concepts.
In the following article, we will look into Bull and Bear Flags, how they can be traded “the right way” and how reliable they are for profitable trading.
We will look at this example from a unique and fresh perspective that is different from the popular continuation patterns as in the classic retail view of it, and compare it to how we can use it from Smart Money Concepts perspective to capitalise on these moves to have higher accuracy in your entry, increase your win rates, and have a higher Risk to Reward ratio to ultimately earn much more profit than if you traded Bull and Bear Flag Patterns as a retail minded trader.
Bull Flag vs Bear Flag Patterns Elements
Both Flag Patterns are preceded by a strong move in the direction of the prevailing trend, this is referred to as the “Flagpole“.
They are followed by the consolidation in price that is called “Flag“. We also refer to it as “Redistribution” for Bear Flags and “Reaccumulation” for Bull Flags.
Using both Flag patterns in technical analysis is a great way to be able to trade the market. However, what most retail traders struggle with is to stay consistent with their results while trading them; and this is mostly because of the way they are being traded.
Both the Bull Flag and Bear Flag Patterns can be part of a profitable trading strategy, however, it’s important to note that you must always remember that these patterns do not exist in isolation and they are not the cause of the price to move in a certain direction.
As their name indicates, they are “Patterns”, which means they are phenomena or the result of the price forming this shape that we call “Bear Flag” and “Bull Flag” Patterns.
Without a real understanding of the underlying “Market Narrative” (what the price is doing now, and where it is likely to go next?), you can fall victim to market manipulation and be stopped out prematurely or be on the wrong side of the trade altogether.
So as you move on with this topic, I will explore in more depth each of these scenarios and how to trade them effectively without falling victim to getting stopped out and how to increase your Risk to Reward by improving your entry.
What is a Bear Flag Pattern?
A Bear Flag Pattern forms during a correction or consolidation in a downtrend. It is an impulsive move downward that has a strong momentum followed by an upward consolidation (Redistribution) in price that indicates the possible continuation of the underlying bearish trend.
What is a Bull Flag Pattern?
Inversely, a Bull Flag Pattern forms during a correction or consolidation in an up trend. It is an impulsive move upward that has a strong momentum followed by a downward consolidation (Reaccumulation) in price that indicates the possible continuation of the underlying bullish trend.
Why do Flags occur in a Bull Flag and Bear Flag Patterns? - Building Foundation
In Smart Money Concepts terms, the terms “Reaccumulation” in a Bullish trend, and “Redistribution” in a Bearish Trend are synonyms for the term “Flag” in Bear and Bull Flag Patterns.
What really differentiates “Redistribution” and “Reaccumulation” from Flags is the fact that Flags only refer to the stage the market is at during the formation of the pattern.
Meanwhile, “Redistribution” and “Reaccumulation” go into much more depth into explaining the “WHY” the consolidation is taking place right now and almost forecast how long this consolidation would last. They give you the “Market Narrative” and help you forecast more accurately where and when to place your entry to get in.
In simple terms, the market moves up and down 24/7 because banks seek liquidity. Without liquidity (matching Buy with Sell Orders and vice versa) there wouldn’t be market movement.
So when the market has moved in a specific direction for a while (Bearish Trend), the market reaches a point where it has exhausted all the present liquidity. So the market has to retrace consolidates to allow for large institutions to allow large funds the opportunity to build on their already profitable positions before the price continues in its direction to the next liquidity zone.
These movements in the price we call “Institutional Order Flow”.
Institutional Order Flow means the direction in the flow of orders of large financial institutions. These usually are measured in Net Long and Net Short positions, which means there is never 100% of the financial institutions who are long or short. Instead, there are always some of them who would be Long and others Shorts but the sum of all the large Financial Institutions would result in Net Long or Net Short.
When Institutions are Net Long, we would have a Bullish Trend and when Institutions are Net Short, we would have a Bearish Trend.
and the fact that there the fluctuations between Net Longs and Net Short orders in the markets cause fluctuations in Liquidity in the Market and as a consequence price movements.
But when Institutions are pausing or not giving enough Buy Orders (to increase their Net Longs or Decrease their Net Shorts) or Sell Orders (to increase their Net Shorts or decrease their Net Shorts), the price goes into a correction phase which we call “Reaccumulation” in a Bullish Market or “Redistribution” in a Bear Market.
So, in a downward trend Redistribution in the Bear Flag Pattern allows institutions to further open short positions and trick smaller funds and retail traders into thinking the market may have reached a turning point making and closing their positions. This allows the Market Maker to be on the other side of those positions.
The inverse applies for Reaccumulation in the Bull Flag Pattern, this occurs in an uptrend, building on long positions while manipulating retail into selling thinking they have reached the top of the trend.
However, one important thing to consider is that Bull and Bear Flag Patterns, work only when they are in line with the direction of the Institutional Order Flow, which in simple words is the direction of the trend on the higher timeframe.
Next, I will go more in-depth in this article on how to find highly accurate and high-probability entries for Bull Flag and Bear Flag Patterns.
But for now, let’s see how we can identify the Bull flag and bear flag patterns on the chart.
How to Identify a Bear flag / Bull flag
Finding a Bear Flag or Bull Flag is a simple process once the initial strong move in the direction of the trend or flagpole is spotted (A – B), wait for a Consolidation Redistribution in a Bearish trend (Example 1 B – C) and Consolidation Reaccumulation in a Bullish trend (Example 2: B – C) to play out.
Example 1: Bear Flag
Example 2: Bull Flag
However, the key point here is that the Bull Flag or Bear Flag Patterns must be identified once the high of the Flagpole has made a higher high compared to a previous price swing, which we call a Break in Market Structure.
When is a Bear Flag or Bull Flag valid? and When to Invalidate them?
There are a few schools of thought that each has its own various conditions under which a Bear or Bull flag becomes invalid. Some of them mention that price should not retrace more than 38% of Fibonacci back inside the channel.
However, this is a very narrow view of the markets because the market will not respect any magic numbers or lines drawn on your chart. Only a clear understanding of the “Market Narrative” and the underlying liquidity zones will give the trader a true edge in understanding when a pattern such as a Bull Flag or Bear Flag will play out as expected.
So, to give you more perspective on things, you should look at the left side of the chart and find if any liquidity zones have been taken out. Liquidity zones are usually areas above old highs in a bullish scenario and old lows in a bearish scenario.
If the price has not yet reached the Liquidity Zone, then you can say that the Bull Flag or Bear Flag Pattern is still valid and it’s safe to assume that the price will most likely continue its direction.
If the price has already reached the Liquidity Zone and came back below that Old High in a Bullish Scenario or Old Low in a Bearish Scenario, then the Bull Flag or Bear Flag are low probability and it would be best not to trade them but instead to wait for another trading opportunity.
The reason is, that if the Liquidity Zone has been reached, then the price is more likely to seek liquidity in the opposite direction causing the price to reverse and causing a Failed Bull Flag or Bear Flag to occur.
The common way to trade Bull Flags and Bear Flags
The most common method of trading a Bear Flag or Bull flag is to wait for a breakout in the direction of the initial move or underlying trend.
In a bearish scenario or underlying bearish trend, this could either be at a break below the last higher low of the flag (Example 1 E) or below the low created by the flagpole (Example 1 B).
With the stop loss above the last high of the flag (Example 1 C).
In a bullish scenario or underlying bullish trend, this could either be at a break above the last lower high of the flag (Example 2 E) or above the high created by the flagpole (Example 2 B).
With the stop loss below the last low of the flag (Example 2 C).
This is the most common method used by retail traders and is prone to false moves or market maker traps which usually gets most traders off-guard with what we call stop hunts.
Have you ever been in trade, gotten stopped out only to move into your original direction later on?
Well, yes this is a Stop Hunt, which is a market manipulation that happens just before the true explosive move. But if you have your stop loss in the wrong place, you would risk getting stopped out
Why trading Bull and Bear Flags the retail way is low probability?
The above example shows how if you view the market without a real understanding of Liquidity Zones and the Market Narrative, you can get stopped with false moves that could be detrimental to your trading career.
Understanding where the Liquidity Zones are and the Market Narrative, should give you a real understanding of where to place your stop loss allowing you to identify the highest probability trade setups and trade the market profitably.
Meanwhile, by understanding concepts that are taught in Smart Money Concepts called Order Blocks and understanding where the Liquidity Zones are, you could increase your Risk to Reward drastically while increasing the accuracy and probability of your trade working out.
Setting targets when trading a Bear or Bull flag
Before setting up the targets, it’s important to determine where we are in the price move or trend.
- Are we close to an area where we would expect a reversal?
- Have we cleared previous Liquidity Zones?
- Do we still have enough room for the price to reach the final target?
- Do we have any Economic Calendar events that are could affect the price reaching the target?
Once you have taken all these factors into consideration, we can determine the target.
For example, if the Bear Flag Pattern occurs in the middle of an expected move, then after a bear flag has been confirmed and the trade is entered, one way to set the target a target level can be determined by measuring the length of the flagpole (A – B), then measuring the same distance from the highest point of the bearish flag (C – D). This would give a trader a reasonable target to take out profits.
Another way to set a target is by simply taking profits below a previous old low once that low is taken out (once the price reaches the next Liquidity Zone) and the inverse would apply in a Bull Flag scenario.
Bull flag Case Study
By following the points discussed previously on how to trade a Bull Flag Pattern, we can see in the following trade example that shows potential as part of a profitable trading model.
However, without taking into consideration all the other factors at play in the market even though this trade worked out, if a trader were to combine this pattern with an Order Block and look at the market structure the trader would enter at a much better price as shown below.
The trader is able to achieve (1) a higher Risk to Reward Ratio and ultimately generate more profits while reducing his risk (2) substantially increase not only the probability of the trade succeeding but also having a more accurate entry point allowingfor a much smaller stop loss.
However, the trader who traded the Bull Flag Pattern the retail way has achieved only 1.7 R:R while achieving a 14.3 Risk to Reward Ratio when combined with Smart Money Concepts.
How reliable are Bull Flags and Bear Flags?
Not all strong moves followed by consolidation or what appears to be Reaccumulation or Redistribution will result in successful Bull or Bear Flags.
As I mentioned earlier, you need to consider where in the trend you are at the moment and whether you have reached a previous liquidity zone or not on the Higher Timeframe, mainly the Daily Timeframe.
Most retail traders will see a classic continuation pattern and jump in the trade just because the pattern has formed without considering all the other factors that lead to making this pattern a valid pattern to consider.
As shown in the below example, without a view of the higher time frame analysis, the retail trader would have no way of knowing that the probability of this Bear Flag continuing the downward move is invalid and should be avoided.
Understanding the higher time frame charts will allow you to identify which patterns are most likely to result in a continuation of the trend and those most likely to reverse, adding another facet and possible trade setup to your trading arsenal.
Should I use Bear Flag and Bull Flag Patterns?
In conclusion, we can ask the question of what a Bull or Bear Flag Pattern indicates with regard to predicting future price movements.
Viewed in isolation they don’t give us any indication of what the price is going to do and whether the trade setup is a high probability or any good to take. Trading Bull Flags and Bear Flags on their own gives a very limited and narrow view of the market, and this explains the reason why most retail traders fail to trade this pattern successfully despite its popularity. Maybe you should do what others aren’t doing and be on the opposite side of the equation and trade the way Smart Money Traders trade? I will leave this to you to decide.
But institutional players increase their Net Longs through Reaccumulation and increase their Net Shorts through Redistributions, which form the Flag Patterns that we know about.
Understanding what institutions are doing and the logic behind why the market should move in a certain direction will increase your chances of success, increase the probability of your trades, and helps you avoid falling into the manipulations traps and getting stopped out.
The following example illustrates how despite following all the steps laid out for trading a bear flag, by trading the bear flag in isolation, the trade is subject to manipulation and falls victim to liquidity runs or stop hunts.
At the end of the day, we can see that Bull and Bear Flag Patterns offer insight that there is likely to be movement in price in the future, however without the backdrop of a clear understanding of Smart Money Concepts and the Market Narrative, (1) what is the price doing at the moment? (2), where the price is likely to go by understanding Liquidity Zones, the Bull and Bear Flag Patterns are nothing more than just patterns.
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How reliable is the bear flag pattern? ›
Reliability of the Bear Flag Pattern
The bear flag pattern is one of the most reliable technical indicators in crypto trading. But no signal or indicator can be full-proof given the uncertain nature of the markets. Users should use risk management techniques to avoid losses, like placing a stop loss.
If a Bull Flag Pattern is formed, then place a buy stop order above the swing high. If the price breaks above the swing high, go long with stop loss 1 ATR below the low of the Bull Flag. If the price moves in your favor, then trail your stop loss with the 50-period Moving Average.What is the bull flag pattern trading strategy? ›
The bull flag pattern is a continuation chart pattern that facilitates an extension of the uptrend. The price action consolidates within the two parallel trend lines in the opposite direction of the uptrend, before breaking out and continuing the uptrend.How reliable are bull flags? ›
Benefits of Trading Bull Flag Patterns. No pattern in the stock market is 100% reliable. Any pattern could resolve with false moves. But the bull flag pattern is one of the more reliable and effective trading patterns.What invalidates a bear flag? ›
As with the bull flag, a clean move to the inside of the flag invalidates the bear flag pattern. The take profit level is calculated by measuring the distance of the flagpole.Can a bear flag turn bullish? ›
A failed bear flag turns into a bullish pattern instead of a bearish one. When learning about flags, a bear flag is always a bearish continuation pattern. So you're expecting a downturn in a stock. However, patterns break down all the time.What is the profit target for bull flag? ›
The bullish flag pattern's initial profit target will be around the previous swing high, and the stop-loss order can be placed below the consolidation structure. Additionally, the bull flag profit target can be established by measuring the distance in price between the flagpole's base and the highest point of the flag.How long do bull flags last? ›
The bull flag chart pattern is a short-term trend and may last anywhere from one to six weeks. If a trader can identify a bull flag chart pattern precisely, he can forecast the upcoming bull trend and leverage it to make profits.What is flag strategy? ›
The flag pattern is used to identify the possible continuation of a previous trend from a point at which price has drifted against that same trend. Should the trend resume, the price increase could be rapid, making the timing of a trade advantageous by noticing the flag pattern.What is the success rate of a bearish flag pattern? ›
Bear Flag Pattern (67.72% Success) The flag is a continuation pattern that can occur after a strong trending move.
Did the bear flag Revolt succeed? ›
The appearance in the territory by American army officer John C. Fremont spurred these citizens to rise up against Mexican rule. While the uprising only lasted a few days, the leaders of the revolt (William Ide and Ezekiel Merritt) found successes after taking the Mexican military outpost at Sonoma.How long did the bear flag last? ›
The California Republic (Spanish: La República de California), or Bear Flag Republic, was an unrecognized breakaway state from Mexico, that for 25 days in 1846 militarily controlled an area north of San Francisco, in and around what is now Sonoma County in California.