How to trade a bearish flag pattern in Forex

Many patterns exist in a price chart that forex traders use to spot BUY or SELL opportunities. A flag pattern is one of them. It emerges after a sudden rise or falls in the price of the forex pair, as it consolidates.

The flag pattern can be bullish or bearish. Forex technical traders use any of these patterns to find the best entry points during the continuation of a trend. 

Our focus in this article is the bearish flag. We examine how it forms, the opportunities it presents, and a few trading techniques in this article. 

Before that, let’s take at what flag patterns are and how they form.

What is a flag pattern?

The flag pattern emerges when a trend makes a sudden pause. The asset price rises or falls abruptly, creating the opportunity to join the ongoing momentum. The flag pattern then forms as the price moves sideways, often in the opposite direction. 

The two trend lines appear as a result of this move. The top and bottom lines slope to form the shape of a flag. Forex traders wait for the price to break out of this flag and continue its usual path. The breakout presents a trading opportunity to join the ongoing trend.

The pattern has a bullish and a bearish one, as we have mentioned. But we will explore the opportunities present in the bearish flag pattern here before we explain the bullish one.

What is a bearish flag pattern?

A bearish flag is a continuation pattern that takes shape in a downtrend market condition. It has the shape of a bullish flag turned upside down. The price consolidates slightly higher after a series of downward movements, forming this shape, which we call the bearish pattern.

It indicates that supply for the asset is higher than demand, i.e. there are more SELLING trades, and the downtrend will continue.

Traders wait for a breakout below the support point where the price consolidates. This point is a signal to join the trend by entering a SELL position.

How to identify a bearish flag pattern

There are three components in a flag pattern, and the bearish flag will show all of them. They include:

• The flag pole
• The flag
• The continuation 

The flag pole

The flag pole begins from the first drop in the price when the market enters a downtrend. The price moves in that direction to form the pole. It continues in that sloppy move for the downtrend to fully establish itself.

The flag

The bearish flag forms as the price slowly move upward to consolidate after the sharp decline. The price retraces to its initial drop point to form an irregular rectangle, looking like a flag. Traders watch out for a breakout to another low in the downtrend so they can take a short position. 

The continuation 

This is the point where the market has consolidated and is now continuing the downward trend. At this point, the trader is getting reading to claim their earnings. The goal here is to take a profit after the next price drop in the currency pair. So take profit would have been set slightly below the new low.

Key points to note:

1. The flag pole starts at the first price drop that ushers in the downtrend condition
2. The price then rises in a sloppy curve to consolidate, forming the flag.
3. The retracement should not be more than 38%. It is not a flag pattern if it is more than this. Some traders would call it a pennant. 
4. Enter a short position at the breakout point near the lower channel of the flag.
5. Prices will most likely break down at a length that’s equivalent to the flag pole.

An example of a bearish flag pattern can be seen in a forex price chart. Let’s imagine the price of the EURUSD drops from 1.1075. The flag pole forms as the price fall from 1.1075 to 1.0875 between March 1st to 4th. This initial drop adds up to 200pips within 3 days. 

Then the price slowly rises to 1.0915 as it consolidates, forming the flag. Note that the bearish flag pattern is only complete after the price breaks to a new low. Traders then use the flag pole to predict the next price drop and place a trade accordingly.

How do you trade a bearish flag pattern in forex?

Once you have identified the bearish flag pattern with certainty, trading the pattern successfully will be easy enough.  

Remember that this pattern is not fully formed until there is a breakout in the lower part of the flag.

It is best to wait for this breakout before finding the appropriate entry point.

Using our example above, we assumed the price has dropped by 200 pips in the last few days, forming the flag pole. It makes a climb, which connotes a short pause in the downtrend. 

You enter a position at the breakout point, where the trend continues its downward movement. The price target can be placed around 1.0855, using our EURUSD example above.

Measure the distance of the flag pole to the break that forms the flag. This determines the price target from the point of the breakout.

Set a stop loss

You should place the stop-loss at the resistance point where the flag took form.

Trade the bear flag once you confirm the volume

The bear flag indicates a high volume in SHORT trades of that forex pair. This increased volume in this trade position forms the flag pole. 

The trend continues as the flag takes shape during consolidation in the falling prices. It means there are fewer BUYING activities for this pair.

Traders then wait for the price to break through the support level. The flag retraces below 50% of the flag pole before the break occurs. 

A candle should close below the flag’s support point to indicate this break in a candlestick chart. Then place a short trade once the next candle emerges.

The volume is a helpful guide in determining what points to enter and exit the market at a target price. It will help you better predict where the break would occur, and how long the trend would hold.

Pros and cons of a bearish flag pattern

The bearish flag pattern helps traders identify opportunities in the midst of a downtrend market. But it is not without a disadvantage, and we examine that here.

Pros

Reliable continuation pattern

As we have mentioned, the bearish flag pattern is effective. Technical traders use it to find the appropriate entry and exit points during a continuation of an ongoing trend.

Useful with other market instruments 

Investors can use the bear flag to trade other assets. Stocks and CFD traders also use it to find opportunities. 

Profitable pattern

This pattern is reliable, as we have mentioned. It has proven high success rates among seasoned traders. Unsuccessful trades are often traced to improper plotting of the pattern.

Shows accurate stop-loss and take-profit points 

It is easy to set the appropriate stop-loss and take-profit levels for a successful trade. You only need to plot the bear flag and identify the breakout point.

Cons

Too technical for novice traders

Finding the pattern might be tough for a newbie trader. Good knowledge of technical indicators is required for this. Skilled traders find it easy to use the pattern but not inexperienced traders.

The flag pattern is one of the popular ones used by skilled forex traders. It takes shape when a trend changes after a sharp rise or fall in the forex pair price.

Let us explore more about its formation.

Is a flag pattern bullish or bearish?

Flag patterns can emerge in a bullish or bearish market condition. The price moves sideways in the chart, causing the trend to pause. It then breaks and continues on its usual path. That is the initial trend before the pause.

The price usually moves in the same direction for a period before the trend reverses once there is a breakout.

Traders capitalize on this and make huge profits using this pattern. But you must first identify its formation to profit from it. It can take form in a bullish or bearish market, as we stated above. 

Bullish flag

This flag emerges in a bullish market. Its flag pole forms from an initial jump in the price, signaling an uptrend condition. It then drops slightly to stabilize, forming the flag. The break which completes the flag occurs at the top, presenting opportunities for a BUY trade.

The bullish flag indicates that there are more buyers in the market. So the price continues in the bullish move. The price reaches its peak at some point and then pulls back. The parallel lines of the price high and low cause the shape of the flag to form. 

Below, we explain how to spot a bullish flag pattern.

How to identify a bullish flag pattern

Like the bearish flag pattern explained above, the bullish flag also has three components. It is a bit tough to identify a flag pattern in the chart. But by carefully following the guidelines below, you can spot the bullish flag:

• The pattern often forms in a bullish market condition. Therefore, look for an upward movement in the price, which starts the trend and forms the flagpole.
• Once you identify the pole, look for the point where the price slowly falls to consolidate, thereby forming the flag.
• The price should not retrace above 38% of the pole to form the flag. If it does, in some cases, that would be a pennant pattern, not a bullish flag. 
• Enter a long trade at the breakout that should occur on the top channel’s high or below the flag.
• The breakout point should be equivalent to the flag pole’s length.

How do you trade the bullish flag pattern in forex?

It is best to stay patient for the price to break before entering the market.

The bullish pattern is very reliable as long as you accurately identify it. Therefore, ensure you have spotted it in the chart.

Then wait for the break to enter a LONG trade. It should occur when the price reaches the top of the channel.

What does a bearish flag look like in forex?

The bearish flag looks like the bullish one in reverse. While the bullish flag pole forms from down to up, the bearish flag pole takes shape from downside to up.

The bearish flag emerges in a bear market when the asset experience more SELLING than BUYING. The implication is that the price of the currency pair drops. 

After the price rises slightly to consolidate, the top and bottom trend lines form the shape of a bearish flag.

To identify the bear flag

First, find the point where the price drops sharply to begin the downtrend, forming the bear flag pole. 

After this sharp drop, the price makes a slight upward climb to consolidate, giving shape to the bear flag.

Identify the trend continuation from the point where the price starts to drop to carry on in the original path of the downtrend.

To trade the bear flag

Traders make sure they observe all the rules to determine it is a true bear flag:

The price pulls back but does not retrace more than 38% of the flag pole. 

It is wise to wait for the candle to close below the bear flag pattern. Then place a SHORT trade when the next candle emerges, that is the next price drop.

Experienced traders like to put a stop-loss order at the top part of the flag. They then place the take-profit at the point of the price target. Remember that the flag pole’s length usually determines this.

This pattern is a profitable one as long as the trader accurately identifies it.

Conclusion

Identifying the bearish pattern is not an easy thing to do. Traders still mistake it for a breakout in a bullish trend, causing their trades to fail or not achieve their full profit. A bearish flag pattern shows the price rising gradually in a downtrend market condition. But bullish breakouts do not move in this manner.

It is helpful to use the trading tools at your disposal to identify breakouts. 

The flag patterns are among the profitable ones. But the trader has to accurately identify a bear or bull flag before they can gain from it. We hope this guide helps you properly identify them in the charts. So that you can make profitable trading decisions.

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