As you delve deeper and deeper into Forex trading, it becomes important to refine your techniques and strategies. You will have decided on the strategies that work for you. You will probably be using Candlestick graphs to help you determine what your next move will be.
The next step is to understand and identify the patterns found in a Candlestick chart. Profitable Forex trading relies on you being able to interpret the patterns and fluctuations on a Candlestick chart. An important Candlestick pattern is a flag (or a pennant).
The Forex flag pattern
When you examine a Candlestick chart, look for long upward trends, the trends that indicate that trading in that commodity is brisk. If we place a trend line drawn either upwards or downwards on the graph against this feature, we should see that the trend line is a long directed line. If the direction is in a positive (money-making) direction, it is extending in a bullish direction. If it is on a downward path, then it is extending in a bearish direction. This identifying feature of a flag and is called the flag pole.
The length of the flag pole indicates the briskness of trade. The more the Forex pair is traded, the longer the flag pole.
For a Bullish flag, the flag pole must end in a series of horizontal trading results that can be lumped together to form a rectangle (the flag). The trading within the rectangle is pretty consistent, with the highs forming a trend line and the lows forming an almost parallel trend line. The rectangle can be purely horizontal, or it can slope downwards towards the right.
If the outline of the results resembles a triangle, it is called a pennant. A pennant is the result of almost consistent highs, but the lows are trending towards the highs. If you look at the trend lines, the low trend line is not parallel to the high trend line, but it is approaching the high trend line giving it a triangular appearance.
The flag pole represents a rapidly increasing (or decreasing) value of the forex pair over a single time frame. This is represented by a steep incline (or decline). At the end of the pole, a series of zig-zagging values can be viewed together encapsulated in a virtual rectangle (or triangle). The rectangular flag could be horizontal, or it could be inclining slightly downwards to the right. We could consider that the Bullish flag represents a pricing structure for the selected Forex pair.
Identifying and using Forex flag poles and flags will add another dimension to your Forex trading. Once you have grasped and can pick out a flag pole and flag, your trading becomes simple and enjoyable.
What is a bullish flag?
The bullish market indicates a positive momentum in Forex trading. If the upward trend is significantly sharp, we may have encountered a Forex bullish flag and flag pole. The flag pole increases to a pivotal point. At the peak, a series (there will typically be 3) of peaks and dips symbolizes the fluctuating activity of the pair. When you insert trend lines, the typical flag and flag pole design emerge.
Identifying the Bullish Flag
The pattern may be difficult to discern. If you use an app, it will help with that detection. If you are going it alone, you may have to employ your imagination and construct trend lines to help you distinguish a possible flag pole and flag pattern.
If you think you have found a flag/flag pole pattern, examine the amount of trading that took place to get it where it is now. If there is a lot of activity, you need to climb on the bandwagon of success before it gets too saturated.
The next thing to look for in the flag is the point of breakout, in other words, the place where the zig-zag pattern suddenly soars upwards. That is when you need to act and buy the Forex pair.
Trend Lines
Trend lines help identify the pattern in a bullish flag. The trend lines will form a capital italic letter F. The starting point of the flag pole (or support area) for a bullish flag is at the bottom, and it inclines sharply to the right as the value increases. The top of the flag pole (in other words, the point before the flag pattern emerges) is the resistance area.
The resistance area defines the beginning of the flag. Within the two trend lines at the top of the F, you will see an undulating pattern like capital “W’s” (WW). There will usually be three sets of dips and peaks within a chosen time frame. These “W’s” indicate activity when people are buying or selling the Forex pair. It is a hectic market, with the peaks and dips being almost uniform. The two bars extending to the right at the top of the F are trend lines defining the flag’s activities.
The flag can be thought of as a resting area where nothing much is happening. Traders are trading, but they are swooping in and out of the trade, so it looks as if almost nothing is happening. Values are rising and falling monotonously. During this time, market corrections are happening so that the pattern can break out of the monotony to start its upward move.
We can translate that F shape into market-related terms. When your chosen Forex pair is in an upwardly mobile condition, we can distinguish the straight line. This straight-line could, under certain conditions, become the flag pole.
Specifications distinguishing flag poles and flags
So what are those conditions? A period of settling needs to occur at the pinnacle of the flag pole, where buyers and sellers are active. The activity causes the values to fluctuate in a zig-zag pattern slanting to the right. The pattern between the trend lines of the flag may slope diagonally downwards to the right. The lowest point in the flag should never drop below the halfway mark of the flag pole. The lowest point should only drop about 40% the size of the flag pole.
There is a breakout point at the end of the zig-zag pattern when the value of the trade recovers and moves up. The expectancy is that the price will continue to move upwards. That will be your signal to buy into the Forex pair.
To identify a flag pole and a flag you need to draw or imagine trend lines. The typical features are:
- A strong positive move in the market. (The flag pole). The flag pole represents the current trend in that specific Forex pair.
- At the top, a sideways movement is detected with fluctuations in the stock (Usually three repeats (the flag)
- An upward movement peels off from the flag’s trend lines, signifying a buy state.
- Normal flag properties
- The flag type is assessed by its direction. If the value is increasing, it is a bullish flag. If the value is decreasing, it is a bearish flag.
- The height of the flag pole indicates the health of the investment.
- The width of the flag establishes the difference between the highest and lowest points. The width should be reasonably compact.
- The length of the flag shows the time span that it has been fluctuating.
There are apps and websites which can help you filter the charts for the type of flag you require. The app will search through available candlestick charts to present a flag (or flags) close to your criteria.
Identifying a “good” bullish flag
- The flag pole shows large consistent volumes of traders. This demonstrates that the traders feel that they are on winning investment. The market displays a dedicated upward trend. Watch out for consistency. Steer away if the flag pole zig zags too much on its way to the flag.
- The pattern in the actual flag part dips and peaks. The dips and peaks should be a consistent wave pattern – not vacillating too far off the previous dip and peak. A wave pattern in a flag is normal but steer away from the erratic pattern.
How do you trade a bullish flag?
New traders will find the concept of flags and flag poles relatively easy. Once a typical flag has been pointed to them, they will, with practice, be able to pick them out pretty quickly. The techniques surrounding trading with a bullish flag are easily learned. Identifying flag patterns opens up a relatively quick and easy way for beginners to trade.
Bull flags should be used to trade a profitable Forex pair. So we look at the number of pips between the buy/sell pair rather than look at patterns emerging from the flag.
Buying into a Bullish flag
A good piece of advice is to buy as soon as the breakout is detected. One way to decide when to enter the market is to look for the first positive candle outside of the breakout. Within the rectangle encompassing the flag, the last fluctuating line will continue upwards to break out of the flag. Typically there will be three red candlesticks in the flag. If a positive (green or blue) candlestick occurs, it will signal the time to buy into the Forex pair.
Selling a Bullish flag
Tricks can be used to establish when to sell. Most traders use the height of the flag pole as their yardstick. On the chart, after the buy signal, measure the height of the flag pole to establish a point where you should consider selling.
Of course, nothing is certain in this wonderful world of ours. So your anticipated upward rising Forex pair may start to misbehave and could tumble downwards. A usual practice will be to establish a stop loss figure when you embark on your trade.
Winning and losing are all part of the trading personality. The wise trader will not allow their losses to become insurmountable. When you are trading with bullish flags, a good stop-loss point will be the lowest point of the flag. Some will choose a value a bit higher up. Choosing a value higher up will minimize your losses. If you examine the graph, your buy point and your stop loss point (if set to the lowest point of the flag) are pretty close, so your losses will be reduced to a palatable level. Do not hang onto pairs that are plummeting.
Is a bear flag bullish?
The short answer is “No”. A bulls market means that things are improving, going up. If you have Forex pairs, then the trading value will get better. A bear’s market means that things are deteriorating.
The bullish flag and the bearish flag are diametrically opposites. With a bullish flag, you buy as soon as the flag pattern is in breakout. When you come across a bearish flag, you sell as it comes out of breakout as things could only get worse. If you do not sell at this point, you had better make sure that you have a built-in stop-loss to protect you from large-scale losses.
If you find yourself looking at a bearish flag, you will notice that the flag pole starts at a point and moves down quite rapidly as people shed their Forex pairs. Eventually, it will get to the point of settling down. After settling down, a set of transactions will show in the horizontal rectangle – the flag. Trading within this section goes up and down. When it goes up, we could say that it has bullish tendencies. But that thought is disrupted when the trade goes down, and we realize that we are looking at a bearish flag.
A bearish flag will continue to decrease, and the only good news that it brings is that it is time to cut your losses. A bearish flag tells you that the trend is going downwards for the foreseeable future.
How do you identify a bull flag?
A bull flag has some distinguishing characteristics
- The flag pole rises aggressively. This rise is due to the many people who are investing in that pair. Because the trend is upwards, more buyers are attracted to the market that may make them some money, and the flag pole increases some more and so on until buyers feel that the market is becoming saturated. This part of the flag is known as run-up.
- As the frenzy calms down, fewer people enter the market, and people leave to invest elsewhere. As the days (or hours) progress, traders come and go causing the candlesticks to fluctuate up and down, resulting in a wavy pattern that looks like a few W’s (WW). This phase is known as consolidation.
- New traders become attracted to this fluctuating market, and the candlesticks rise outside the rectangle. As they rise out of the rectangle, we say they have reached breakout.
FAQ
Why is it called a flag pattern?
Using trend lines, you can distinguish a flag pole and a flag extending to the right.
What is the difference between a bullish flag and a bearish flag?
The flag pole of a bullish flag starts low and ends high with a rectangular flag extending to the right. A Bearish flag starts high and ends low, with a rectangular figure extending to the right.
Should I use a flag pattern and exclude all other techniques?
Definitely not. Any trading is affected by many outside factors. Bullish flags are a good starting point, but you will need other techniques to keep up your game.
Can a bullish flag help me issue a sell command?
Yes. Using the pole length to read off a value will be your signal to sell. You need to build in a stop-loss. A stop-loss will prevent a monetary loss if there is a sudden dip in the trade.
Conclusion
Anything happening in the market is susceptible to many factors. Charts are a pictorial way to see and understand financial movement. The Bullish flag is one of the more stable graph techniques. Once you have learned to recognize and interpret them, your trading will take on another facet. A wise course is to explore other techniques to back up your decisions as trading Forex can present many surprises, not all pleasant.
It does not matter what Forex pair you trade or how you make your decisions, you need to keep up with the news in your selected countries is a must. Things could pivot on a natural disaster or a physical disaster like riots, elections, etc.
There are many advantages to trading Bullish flags
- It works no matter what trading you decide to do. It works in Forex and the stock exchange.
- It paints a clear picture of where you can enter and leave a transaction.
- With stop-loss in place, losses can be kept small. There is a good possibility of profiting from the trade.
- Cons include
- You need to learn to use a Bullish flag.
- It may take time for the typical flag pattern to develop
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