Bull Flag: How to Profit From Bull Flag Trading in the Stock Market

There are many chart patterns to watch for when trading in the stock market. I’ve even developed some of my own, such as the supernova. The bull flag is a pattern you might see in some stocks — and it’s one you should pay attention to.

What is a bull flag? Why is it important? I’ll help you with those questions and more.

What Is Bull Flag?

There are two parts to this question, so I want to break them down carefully so you understand exactly what a bull flag signifies. It’s a chart pattern that’s dependent upon specific stock price movements over a certain period of time.

First, what does bull mean?

Bull is a word used to describe an upward trend in a stock or index. In other words, stock prices are rising. If someone tells you a stock is bullish, he or she means that it’s increasing in price.

This contrasts with the stock market term bear, which indicates a downward trend. When a stock price falls, it’s considered bearish.

What Is Bull Flag
Bull and bear shapes with symbols of stock market trends on them created by dominic8 – Shutterstock.com

Next, what is a flag?

A flag is a chart pattern that resembles a flag on a pole. On the chart, the stock price rises rapidly, forming an almost straight pole, then consolidates over a period of time, forming the flag. In the consolidation period, the stock price might rise or fall, but only in small increments, which distinguishes the flag from its pole.

The Bull Flag Stock Pattern

The important thing about a bull flag is that it often repeats itself. It’s easy to see why when you consider how human psychology works.

Traders see a strong rally in the stock price followed by some volatility. Everyone wants to take advantage of that trend, so they buy up shares like crazy. Then you see the vertical spike again, creating another flagpole and its associated flag.

Watching for sudden breakouts can help you become a better trader. Keep in mind, though, that like any stock pattern, this one can fool you. If, for instance, negative information about the company surfaces right at the breakout point, traders might not want to risk diving in.

Unfortunately, a bear flag can follow when market conditions don’t support another breakout. The bear flag is the opposite of the bull flag — an upside-down flag, if you will.

What Does It Mean When a Stock is Flagging?

You might hear from someone that a particular stock is flagging — either a bullish flag or a bearish flag. What the person means is that the stock is forming the bear or bull flag pattern and that the trend is likely to continue.

Many people consider bull flags to be among the most reliable stock patterns. False signals do happen, though. That’s why I typically recommend waiting until the stock price breaks out on the new pattern before you make your play. Otherwise, the stock could lose the flag pattern and sink.

How to Profit from Bull Flag Trading

Entry and exit points are extremely important if you want to profit from bull flag trading. If you get in too early, you might fall for a false signal and lose your investment. Conversely, if you wait too long after the breakout, your chances for huge profits diminish.

How to Profit from Bull Flag Trading
Financial investment in bull market created by Pisit.Sj – Shutterstock.com

Bull Flag Technical Analysis

First, you need to know exactly what the bull flag looks like. That requires technical analysis — in other words, reading charts.

The technicals can vary a bit depending on the stock’s unique physiology on the chart. For instance, the flag itself might look more triangular than rectangular. That makes it a bull pennant, but we’ll get into that more later.

In the flag itself, fluctuations are often small and fast. That’s why you get the flag pattern, which can either be horizontal or downward-trending. Then the stock breaks resistance and spikes upward in the traditional flagpole pattern.

Candlestick Bull Flag

If you’re familiar with my work, you might already know about my affection for candlestick patterns. They’re beautiful to look at and easy to read, especially when it comes to the candlestick bull flag.

I think it’s easier to see the flag pattern when you’re looking at a candlestick chart. The flagpole might look about the same as it does on a line chart, but the flag portion comes out more distinctly. If you’re looking for bull flags to trade, I recommend using candlestick patterns exclusively.

Bullish Flag Formation: Examples of Bull Flag Pattern in Charts

As I said previously, bullish flag formation can look a little different since every stock is unique. Some are cleaner than others — you can distinctly see the flagpole and flag at a glance — while others are more difficult to decipher.

Horizontal Rectangle Flags

In a horizontal rectangle bullish flag, you’ll see very little variation between the resistance and support points. If you draw a line from one to the other, they’ll follow a relatively straight line.

Horizontal Rectangle Angled Down Away

The second type of bullish flag formation looks like a drooping flag. The support and resistance points dip for the length of the flag before shooting up in another flagpole and breaking resistance.

Bullish Pennant: Symmetrical Triangle

In a bullish pennant, the rectangle is replaced with a triangle. The support and resistance points start out fairly far apart, but close in to a point before the flagpole gets raised.

Differences Between Flag Patterns

Technically, trading stocks based on flag and pennant patterns shouldn’t vary much based on their shape or trend. Both types of patterns have similar movements, so your stop losses and price targets will simply depend on whether you’re going long or short and whether the stock is uptrending or downtrending.

Bull Flag vs. Bear Flag

Remember, a bull pattern means your stock is moving up. It’s an uptrending pattern based on increased interest in the stock. The initial rally is followed by a brief period of sideways pricing action.

The bear flag is the exact opposite. It looks the same except that the price action is downtrending.

Bull Flag vs. Bull Pennant

The trend lines on a bull pennant resemble a cone or triangle instead of a rectangle. That’s the only difference between the two patterns. You’ll notice that the highs and lows don’t trend downward, but remain relatively horizontal.

My Tips to Use the Bull Flag Strategy on Day Trades

Many bull flag patterns appear on stocks over long periods of time, but I want to avoid those for now. Instead, let’s talk about day trading strategies based on bull flags.

My Tips to Use the Bull Flag Strategy on Day Trades
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Pay Attention to the Resistance

The resistance is the most important thing to watch on a bull flag pattern. It’s what’s keeping the stock from rallying again, and you don’t want to jump in too far ahead of the action.

Continuation patterns like the bull flag always repeat the pattern — hence the name. The stock could give a false signal in the pennant or flag, and then fail to rally again.

Remember That Stocks Usually Offer You a Second Entry Chance

I love continuation patterns because you can rely on them. If you don’t get the right entry the first time around, you can usually go after it again when the stock begins to rally for a second time. Pay attention to these stocks once you notice the pattern so you’re ready to jump in for a big profit.

Know the Importance of Using a Stop Loss

Always use stop losses when you’re trading based on bull flags. Ideally, your stop loss should be the point at which the stock price trends below the breakout point. At that moment, exit the trade to cut your losses because you’re unlikely to see it rally again.

Follow Price Action

It’s also important to pay attention to the price action within the flag. Where are the support and resistance? How far apart are the fluctuations? And over what time period do the fluctuations take place?

You’re waiting for confirmation that the trend will continue. In other words, you want to know the point at which the stock breaks resistance. Use that entry point to take advantage of the subsequent rally.

Let the Probabilities Take Care of the Rest

When I say that bull flags are reliable, I don’t mean to imply that they’re foolproof. No stock pattern is. However, once you’ve done your due diligence, identified the pattern, and paid attention to price action, you have to believe that the probabilities will protect you.

Sometimes it backfires, but as long as you have a stop loss in place, you’ll be fine.

Master Your Skills with Professional Assistance

Learning stock patterns can take months — if not years. It’s a complex skill to master, which is why I recommend getting professional assistance before you start trading stocks.

Why Enroll Yourself in My Trading Challenge?

Working with my Trading Challenge students is the most rewarding part of my job. I get to help contribute to other people’s success and watch them flourish using my techniques.

You don’t need a personal finance coach who will charge $300 per hour to teach you how to trade stocks. Instead, you need a community of like-minded people who all enjoy learning about and capitalizing on the stock market.

That’s exactly what my Trading Challenge offers. Will you be my next success story?

Conclusion

I spend a lot of time reading charts because they tell a complicated story. History really does repeat itself, and if you can recognize the patterns that suggest future activity, you can capitalize on stocks that other people aren’t even aware of.

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