Every stock trading day has low points and high points. If some stock trading days are interesting, others can be as uneventful as possible. Trading is a skill that requires experience and sound understanding of the process. One of the process understanding aspects is to understand the various terms used for stock trading. Whether you are day trading, swing trading or any other type, the understanding of these terms is vital.
In this write-up, we discuss trading bull flags and bear flags.
What Is a Flag Pattern?
A flag pattern is supposed to be a pattern that shows continuation of a trend. It is named so because its image represents that of a flag on a flagpole. A flag is consists of an explosive strong price move that makes the flagpole, followed by an orderly and diagonally symmetrical pullback, which forms the flag. Whilst the trend line resistance on the flag breaks, it triggers the next leg of the trend move and the stock proceeds forward. What separates the flag from a typical breakout or breakdown is the pole formation representing almost a vertical and parabolic initial rate move. Flag patterns can be bullish or bearish.
What is Bullish Flag?
A bullish flag has a pattern that starts with a nearly vertical price spike. This spike catches sellers off-guard and go into frenzy as various buyers start coming in. at some point, the price peaks and an orderly pullback is formed. At this point, the lows and highs are parallel to each other so a tilted triangle is formed.
The upper and lower trend lines are created to show a parallel diagonal nature. The breakout occurs when the upper resistance trend line breaks as prices go back towards the high of the formation. The prices explode to through to make a trigger for another breakout and uptrend move. The sharpness of the spike on the flagpole determines the powerfulness of the bull flag.
What is Bearish Flag?
The bearish flag is the upside down version of the bull flag. The structure is the same but only in an inverted formation. The flagpole in the bearish flag forms an almost vertical panic price drop as the bulls get blindsided by the seller. Afterwards, a bounce occurs that has parallel upper and lower trend lines. This bounce forms the flag.
As soon as the lower trend line breaks, a trigger occurs that produces panic sellers as the downtrend proceeds to another leg down. Similar to the bull flag, the intensity of the drop on the flagpole determines how strong the bear flag is.
Stock trading is always a risky business because the market is a volatile place. The stock market can be affected by external events. However, with experience and understanding of the process it is easier to increase chances of profit and reduce the risk of loss. Trading using the flag patterns requires patience as the trader has to wait for the flag to form and plot the upper and lower trend lines.
We will try our best to keep this blog full of knowledge nugets supported by our research from swingalpha.com