ThinkMarkets > Learn to trade > > Bearish Patterns > Bear Flag Pattern
The bearish flag is a candlestick chart pattern that signals the extension of the downtrend once the temporary pause is finished. As a continuation pattern, the bear flag helps sellers to push the price action further lower.
After a strong downtrend, the price action consolidates within the two parallel trend lines in the opposite direction of the downtrend. Once the supporting trend line gets broken, the bear flag pattern is activated as the price action continues trading lower.
In this blog post we look at what a bear flag is, its structure, as well as its main strengths and weaknesses. Furthermore, we will also share a simple trading strategy to show how to trade a bear flag and make profit.
What the Bear Flag Tells Us
As it’s the case with a bull flag, its bearish counterpart consists of the flagpole and a flag. The former is constituted after the price action trades in a downtrend, making the lower highs and lower lows.
Once the new low is in place, the price action starts to rebound higher as the sellers take a breather. This consolidation takes place within a parallel channel, unlike in the bearish pennant where the consolidation is formatted in a wedge or a triangle.
The buyers use the consolidation to try and weaken the momentum of the sellers, who are in control of the price action. On the other hand, the bears take a step back to consolidate the most recent gains and prepare for another push lower.
This consolidation phase shouldn’t extend too high. Depending on the strength of a downtrend, the rebound may be sharper or milder. In general, the rebound shouldn’t extend above the 50% Fibonacci retracement of the flagpole.
In a textbook example, a pullback should end at around 38.2% Fibonacci retracement. The shorter the rebound, the stronger the downtrend is, and the stronger the breakout is expected to be.
These three elements are integral for the bearish flag to occur:
The flagpole - the asset’s price must trade lower in a series of the higher highs and higher lows;
Flag - a consolidation must take place between two parallel trend lines in an uptrend;
A breakout - a break of the supporting trend line signals the activation of the pattern.
Strengths and Weaknesses
As said earlier, the bear flag is a continuation pattern that facilitates the extension lower. As a chart pattern itself, the bear flag makes sure that traders are able to identify the stage which the downtrend is currently in.
More precisely, the flag will tell us whether the consolidation phase is over as the sellers increase their pressure. The breakout provides us with precisely defined levels to play with, as you will see in the example below.
In general, the bear flag is considered to be a strong technical pattern. This is especially the case when the retracement ends at around 38.2%, creating a textbook bear flag pattern. Therefore, its greatest advantage is that it offers a very attractiverisk-reward ratio, as levels are clearly defined.
The apparent weakness is that the consolidation phase may result in a change of the trend direction. Sellers may lose momentum as the consolidation drags on, while the buyers may grow in confidence that this current phase is not a consolidation, but rather a reversal.
Therefore, it's advised not to trade flags that have long and choppy consolidation phases, as well as those that extend higher than 50%.
Spotting the Bear Flag Chart Pattern
As mentioned earlier, the bear flag is a bearish continuation pattern. The first step in identifying the bear flag is to look for a downtrend. Next, the rebound should take place within an ascending channel, while we monitor the degree of the correction.
EUR/USD has been moving lower in an aggressive downtrend before a mild rebound started, which was short-lived given the overall strength of the initial move lower. Still, the price action consolidated within the two parallel lines before the bears had retaken control.
In this case, the rebound didn’t even manage to extend to the first Fibonacci retracement level of 23.6% before the sellers were successful in pushing the action lower. Hence, the overall downtrend usually dictates the power and pace of a rebound.
Trading the Bear Flag Pattern
The process of trading the bearish flag is based on the same principles we apply when we trade other candlestick patterns. Once we spot the flag, we move to a wait-and-see regime to see whether a break of the supporting trend line will occur.
Many traders are too eager to enter the market and frequently “jump the gun” before the actual breakout has even occurred. Hence, do remember the pattern goes “live” only when the breakout takes place.
In our example, we arepresented with both standard entry options after the breakout occurs. The first option results in the opening of a trade as soon as the breakout candle closes below the flag.
On the other hand, we may eventually opt to wait for a throwback, when the price action returns to the “crime scene” to retest the broken channel. This option offers a better risk-reward since the entry is at a higher price. Contrarily, the first option means you can’t miss out on a trade as there are no guarantees that a throwback may take place at all.
Just to make sure that we are in a trade, we choose option no.1. Hence, a sell trade is entered after the breakout candle closed comfortably below the lower trend line. The stop loss is around 20 pips higher from the entry and within the channel territory. 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. The trend line is then copy-pasted, starting from the point where the breakout occurred, with the ending point signalling a level where we should consider booking our profits, if the opportunity arises.
Ultimately, our take-profit order is hit, which results in gains of around 85 pips. Once compared with the associated risk of 20 pips, this makes for a very attractive R:R ratio. In case we opted for the second option, we would have gained 5 pips more and risked the same number of pips less.
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FAQs
How do you identify a bear flag? ›
A bear flag will look like an inverted bull flag. In a downtrend a bear flag will highlight a slow consolidation higher after an aggressive move lower.
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.
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. As a result, when a bear flag fails, you buy the move up instead of selling into a downturn.
What are bearish candlestick patterns? ›What is a Bearish Engulfing Pattern? A bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that eclipses or "engulfs" the smaller up candle.
What does the bear flag represent? ›A bear within gay male culture refers to a large-sized hairier man who projects a sense of “rugged masculinity”. The Bear Brotherhood pride flag was meant to represent the bear subculture within the wider LGBTQ+ community. The Bear Brotherhood pride flag was designed in 1995 by Craig Byrnes.
What does a bear flag indicate? ›The bear flag indicates that the current price trend may be coming to an end and the price target is reversing itself. However, it does not guarantee trend reversal: the pattern can be easily invalidated by market conditions or other factors.
How do you trade the bearish flag pattern? ›To trade a bearish or bullish flag pattern, you'd look to open a position shortly after the market breaks out, so you can profit from the resulting move. In a bull flag, you'd place a buy order above the resistance line. In a bear flag, it's a sell order below support.
What are the characteristics of bear flag pattern? ›A bear flag is a bearish chart pattern that's formed by two declines separated by a brief consolidating retracement period. The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower trendlines, which form the flag.
How far does a bear flag retrace? ›Look for the bear flag itself, which is a period of consolidation after the initial price decline. You may notice that the price slowly channels upward and retrace a portion of the initial move. This retracement should never be more than half of the initial price decline.
How do you know if a bear market is coming? ›One of the best ways to determine whether a bear market is pending is to watch interest rates. If the Federal Reserve lowers interest rates in response to a slowing economy, it's a good clue that a bear market could be on the way. But sometimes a bear market begins even before interest rates are lowered.
What confirms a bear market? ›
Some investors define a bear market specifically as a decline of at least 20% in a stock or index from its previous peak, with the peak defining the beginning of the bear market, which is only recognized in hindsight following the 20% decline.
Do you buy when its bearish? ›One thing to keep in mind during bear markets is that you aren't going to invest at the bottom. Buy stocks because you want to own the business for the long term, even if the share price goes down a little more after you buy.
How do you read a bearish chart? ›A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.
What is the most reliable bearish candlestick pattern? ›Which candlestick pattern is most reliable? Many patterns are preferred and deemed the most reliable by different traders. Some of the most popular are: bullish/bearish engulfing lines; bullish/bearish long-legged doji; and bullish/bearish abandoned baby top and bottom.
What is the most powerful candlestick pattern? ›- Doji. Considered to be one of the most important single candlestick patterns, the doji can give you an insight into the market sentiment. ...
- Dragonfly doji. ...
- Gravestone doji. ...
- Spinning top. ...
- Hammer.
The main difference between the bull and bear flag patterns is the direction of the trend. The bullish flag pattern occurs in an uptrend, while the bearish flag pattern appears in a downtrend. These patterns are helpful for traders who wish to take advantage of short-term and long-term market trends.
How can you tell if a bear is tagged? ›While a bear is immobilized during a capture, ear tags are inserted in each of the bear's ears. Unique color combinations of ear tags allow researchers to identify individual bears from photos or sightings. The bear is also given a tattoo on its inner lip of an assigned research name, such as B001.
What is the difference between bear flag and bear pennant? ›"Bear" flags also have a tendency to slope against the trend. Their trendlines run parallel as well. Pennants look very much like symmetrical triangles. But pennants are typically smaller in size (volatility) and duration.
Which state flag features a bear? ›The Bear Flag is the official flag of the U.S. state of California. The precursor of the flag was first flown during the 1846 Bear Flag Revolt and was also known as the Bear Flag.