I say it all the time: patterns are everything in trading. So today, I want to do a deep dive into the bull flag pattern.
The bull flag is a smart pattern to understand and learn to spot. Why?
With massive breakout patterns like my favorite, the supernova, it can be hard to get a controlled entry into the trade. Breakouts can move fast, so it can be hard to get your trade executed where you expect.
But that’s not necessarily the case with the bull flag trading pattern.
And if you want to trade it, you need to understand the bull flag formation and strategy. You need to be able to recognize when it’s happening. After all, if you can’t recognize the pattern, you can’t trade the pattern.
So let’s break down the bull flag trading strategy. First up, let’s tackle the…
Table of Contents
- 1 Definition: What Is a Bull Flag?
- 2 Bull Flag Pattern
- 3 Bull Flag Pattern Examples
- 4 What Does It Mean When a Stock Is Flagging?
- 5 Bull Flag Rules
- 6 How to Trade the Bull Flag Pattern
- 7 Bullish Flag Formation: Examples of the Pattern in Charts
- 8 Differences Between Flag Patterns
- 9 My Tips to Use This Strategy on Day Trades
- 10 Conclusion
Definition: What Is a Bull Flag?
There are two parts to this question. I want to break them down so it’s very clear and you understand exactly what a bull flag is.
This chart pattern is dependent on specific stock price movements over a certain period of time.
1.) First, What Does ‘Bull’ Mean?
Bull is used to describe an upward trend in a stock or index. In other words, stock prices are rising. If a stock is bullish, that means its price is going up.
That’s in contrast to the stock market term ‘bear,’ which indicates a downward trend. When a stock price falls, it’s considered bearish.
To read more about bullish and bearish patterns, check out this post.
2.) What Is a Flag?
Here, a flag is a chart pattern that resembles a flag on a flagpole.
On the chart, the stock price rises rapidly. It forms an almost straight pole, then consolidates over a period of time. That’s where the flag forms. In the consolidation period, the stock price might rise or fall, but only in small increments. That distinguishes the flag from its pole.
Don’t worry, we’ll get to an example in a bit.
For more chart patterns you should know, read this post.
Bull Flag Pattern
The important thing about the bull flag pattern is that it often repeats.
It’s all about trading psychology. Let’s break it down.
Traders get FOMO — they want to get in on the action. So as soon as they see a stock’s price dip a little, they jump in and buy shares. So what was a dip can quickly turn around. That increase forms the flagpole.
With a bull flag chart, traders see a strong rally in the stock price. That’s followed by a period of consolidation where some traders sell and others start to buy.
This can place some downward pressure on the price, so watch it closely here.
Last, you’ll see an end to the selling and the buyers will take charge once again. That can lead to another breakout.
Is it smart to watch for breakout patterns like the bull flag? Absolutely. But keep in mind that like any stock pattern, a bull flag can fool you. If there’s a negative catalyst about the company, the breakout you’re expecting may not happen.
Listen and react to the market. Don’t predict. A bear flag can follow when the market doesn’t support another breakout. The bear flag is the opposite of its bull counterpart — like an upside-down flag.
Bull Flag Pattern Examples
Here’s an example of a bull pennant flag. This one is on Vystar Corporation (OTCQB: VYST):
This is a great example of a clean chart with a well-defined bull flag. This one’s called the bull pennant flag since it happens to be in the shape of a pennant.
Let’s look at another example. This is the classic example of the bull flag on Creative Realities, Inc. (NASDAQ: CREX). You see the flag pole to the left, nearly straight up. In this pattern, the formation looks like a flag hanging down from a pole.
Print these charts out or keep them in a digital journal where you can refer to them often. It’s easy to spot them in hindsight but much harder in the moment.
You gotta study charts so you can learn to recognize them in the heat of the moment.
What Does It Mean When a Stock Is Flagging?
If you hear a trader say a stock is flagging, it means the stock may be forming a bull or bear flag pattern. But don’t jump into the trade just yet…
It could be a false signal.
Again, don’t try to predict. The flag formation may not complete as you expect. So watch and wait. Learn to trade like a sniper.
A stock that’s flagging is setting up for a potential trade. The consolidation period is when you watch and wait.
If the stock can break out of consolidation, that’s when it’s time to trade.
Bull Flag Rules
Bull flag patterns must meet certain criteria. Let’s look at a few guidelines.
First, there must be a strong uptrend — or better yet a vertical spike. This forms the flagpole. Ideally, the price goes nearly straight up. Just like in the examples we looked at earlier.
Afterward, you gotta have that consolidation period. It won’t always look the same, so expect it to vary from flag to flag. We’ve looked at a classic bull flag and bull pennant flag already. We’ll get to two more later in this post.
Last, you know it’s a bull flag when you see a breakout after the first spike and consolidation.
How to Trade the Bull Flag Pattern
With this pattern, buying the breakout is the easy part.
Here’s where a lot of traders struggle: failed breakouts. It looks exactly like a normal breakout — but the pattern fails and the price quickly reverses.
What should you do when the breakout fails?
Follow rule number one and cut your losses quickly.
You also need to set reasonable profit targets. Don’t get greedy. Lock in those singles and remember to sell into strength.
First, you need to know which stocks are in play. Need help finding stocks to trade? Sign up for my free watchlist to learn my process behind watching stocks.
Part of my process is to scan for stocks every day. No big surprise here, I use StockToTrade. I helped design it, especially for penny stocks. No other platform can alert you to breaking news and price action as quickly as StockToTrade.
Next, you need to look for the best opportunities. Don’t waste your time with boring charts. Look for clean charts with strong patterns that you’ve learned to recognize through hours and hours of studying.
Only trade when the opportunity is right for your strategy. Otherwise, you can risk overtrading.
Bull Flag Candlestick Pattern
I love candlestick patterns. They’re clean and easy to read — especially when it comes to the bull flag candlestick pattern.
I think it’s easier to see the flag pattern when you’re looking at a candlestick chart. The flagpole might look the same as it does on a line chart, but the flag portion can be more distinct. If you’re looking for bull flag patterns to trade, I recommend using candlestick patterns.
Bull Flag Pattern Trading
When trading a bull flag I prefer to wait for confirmation that the flag is complete. Never buy a stock that you think will breakout.
If you buy too early, you can end up in a bad spot. Even if you’re right, the stock can stay in consolidation for days. If you have a small account, holding trades forever limits your ability to take other setups.
So wait for that confirmation.
I wait for the second breakout after the price breaks through the top of the flag. If the price falls back down, get out. Remember to cut those losses quickly.
Bullish Flag Formation: Examples of the Pattern in Charts
As I said previously, the formation can look a little different in every trade. Every stock chart is unique. I’ve shown you two examples so far. Now let’s look at two more.
Bullish Pennant: Symmetrical Triangle
In this example, the flag forms a small pointy triangle on top of the flagpole. You can go back to the VYST chart we reviewed earlier.
Classic Flag Pattern
This formation looks like a drooping flag. The support and resistance lines dip for the length of the flag before shooting up in a breakout through resistance.
This is the textbook example we looked at earlier with the CREX chart.
Flat Top Breakout
These are the easiest to recognize because the flat line can be easy to spot. I drew a red line on the flat top in the chart for Kala Pharmaceuticals, Inc. (NASDAQ: KALA) to make it more obvious.
This flag is right at the top of the flagpole, and the following breakout is beautiful. This breakout continues with a nice uptrend.
This is a great example of an uptrend, pull back, and secondary breakout. This is the type of play I like to look for — a nice clean chart.
Differences Between Flag Patterns
Let’s look at some different flag patterns and how you can spot the differences between them.
Bull Flag vs. Bear Flag
The bull flag rises, dips, and consolidates before continuing to move up.
The bear flag is the exact opposite. It looks the same, but the price is falling. After an initial first drop, a flag will form and trend upward or horizontal before continuing to breakdown.
Bull Flag vs. Pennant
The support and resistance lines on a bull pennant flag resemble a cone or triangle. It’s still a bull flag — just a different shape.
The pennant flag narrows to a point, eventually breaking to the high side. Other bulls flags will have parallel lines.
All bull pennant flags are bull flags … but not all bulls flags are pennant flags.
Bull Flag vs. Flat Top Breakout
A traditional bull flag has a downtrend after the initial rally. A flat top break isn’t quite the same as a classic bull flag. But there are similarities, and you can trade them the same way.
The flat top breakout means that first there’s a flat line near the chart’s highs. This line forms a resistance level.
The support level isn’t always as well defined.
A breakout above the flat top line completes this bull flag.
My Tips to Use This Strategy on Day Trades
Let’s talk about smart day trading strategies for bull flag patterns.
Pay Attention to the Resistance
The resistance is the most important thing to watch on a bull flag pattern. It’s what keeps the stock from rallying again. You don’t want to jump in too far ahead of the action.
Continuation patterns like the bull flag can repeat the pattern — hence the name. The stock could give a false signal in the pennant or flag, and then fail to rally again.
Wait for the line of resistance to form, then watch for the price to break out above that line before buying.
If the breakout fails and falls back below resistance, don’t hold and hope. Cut your losses and get out. Hope is not a strategy!
Remember That Stocks Can 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 and be ready to jump in. Be prepared!
Know the Importance of Using a Stop Loss
Stops are what keep you in the game long term. Never let a small loss turn into a big loss.
This is the most important lesson I teach my students. And I’ve learned this the hard way through experience. You can read all about how a $500K loss nearly ruined me in my book “An American Hedge Fund.”
Ideally, you set your stop loss where the stock price trends below the breakout point. At that moment, exit the trade to cut your losses. It’s not likely it can rally again.
Follow the Price Action
Never try to predict the next move. Wait for the price action to confirm the pattern.
It’s better to be a little late than to be wrong.
Stock prices move in strange ways sometimes. And there are tons of fake breakouts and fake breakdowns.
Sometimes you’ll be wrong. and that’s OK. There will always be more trades. Learn from your mistakes so you can be better prepared next time.
Master Your Skills with a Trading Mentor
Learning stock patterns can take months — if not years. Trading these patterns is a complex skill to master. I learned the hard way … which is why I recommend getting a professional mentor when you start trading.
Here’s what I wish I had when I started…
My Trading Challenge
When I started I was on my own.
It took me years to master the penny stocks niche. I still make some mistakes today. Every trader does. The key is to keep learning. And I want to teach you to be a smarter, self-sufficient trader. Just like my top students.
My Trading Challenge is a way for you to reduce your learning curve. Will you be my next top student?
Find out if you make the cut … Apply today!
The bull flag pattern is great for newer traders. It’s clean and easy to recognize.
The key to trading any pattern is learning how to manage your risk. Manage the downside and cut your losses if a trade goes against you.
Study these bull and bear flag patterns until you know it well. My top students know just how critical it is to study. The key to trading any pattern is recognizing it. And that comes with lots of practice.
Do you promise to study the bull flag pattern and more? Comment below if you promise to study every day.