Erik Weijers, 6 months ago

What is a bull flag?

After a fierce jump, the price may move more or less horizontally for a while. Only to then shoot through to higher levels again. This temporary consolidation is called a bull flag. It is a pretty reliable pattern.

In this pattern, the upward movement is the flagpole, and the sideways movement is the flag. The way the sideways move goes can be in a horizontal or slightly descending channel or in a true flag (or pennant actually) - the third picture below. Finally, the breakout to the upside from the flag follows.

Of course, bull flags in the real world are less neat than these schematic representations but the principle is clear. In an up market, they are periods in which buy and sell orders more or less balance each other out for a while. The first people to take profits keep new investors balanced for a while, until the market runs out of profit-takers. Then the price has to go up again.

Trading volume

If we look at the trading volume in this pattern, we see that it is high in the flagpole and decreasing in the flag. At the breakout, the volume may go back up but it does not have to.

How do you trade the bull flag?

If you want to take advantage of the bull flag, you need to have a few things in place. First, you need to have the lines of the flag in view.

Next, the trick is to determine the breakout: the hour or day when the price chart jumps away from the consolidation phase. A little caution comes in handy here. In fact, it happens that the breakout is quickly undone. That is why some traders wait for the retest of the breakout line. If the break-out limit is hit and the trip up continues with conviction, it is time to open your long.

So when do you take profits? When you want, of course, and it doesn't hurt to do so in increments. But the point at which the expected top of the bull flag is reached is from the breakout as high as the original flag pole - see the picture.

If you want, you can set a stop-loss somewhere just below the lowest price level of the flag. If the price drops below that, it is almost certain that your trade is invalidated.

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