There are literally tens of technical chart patterns but few among them generally stand out and are seen manifesting on the chart more often than the others like the ascending triangle pattern , head and shoulders , bull flag pattern , these patterns are seen quite often and give a very good opportunity to the traders to trade them for profits , we have talked about the magic of ascending triangle pattern , today we will discuss how the bull flag pattern works and how both day traders and swing traders can make use of it .
What is Bull Flag pattern ?
Bull flag as the name suggests the pattern looks like a flag on a pole , it is a bullish continuation pattern , a series of candles form the pole and the consolidation after that forms the flag part hence the combination of the both looks like a flag on a pole hence the name bull flag pattern , the name bull is attached to it because the pattern is bullish in nature and generally after the formation of the pattern the market will tend to move upwards hence spotting bull flag in a bullish trend can give opportunity to bulls for entering a bullish trade , this pattern is useful not just to swing traders but also day traders , this can occur in any time frame hence gives equal opportunity to any type of trader.
One thing to note is that the lowest part of the flag should never be near the lower part of the pole or touch the lower part of the pole , if that happens then certainly it isn’t a bull flag because there shouldn’t be such a strong consolidation or pullback , the character stick of bull flag is weak pullback which signifies the strength in the bullish market trend.
Logic behind the Bull Flag pattern –
The logic behind the bull flag is very simple and easily understandable by any traders who knows basics of the technical analysis , in technical analysis of any stock or market a bullish trend forms when the candlesticks form higher highs and higher lows on the technical chart that is a pattern of impulse and retracement waves on the technical chart is formed , the character stick of bull flag is a longer impulse wave and a much shorter consolidation wave or pullback which signify that the strength in the trend is intact , hence the logic is really simple , the bull flag only represents a higher high and higher low on the technical chart , bull flag is a bullish continuation pattern and the trend should continue after the formation of the pattern but sometimes even the technical patterns can fail and hence the stop loss should be placed while trading any chart pattern.
Bull flag pattern in Ashok Leyland –
Above is the technical chart of Ashok Leyland which is traded on NSE , look at the formation of the pole in form of big bullish marubozu candlesticks and then the stock consolidated for some time and formed the flag part , also look how the stock took support at the 21 day Moving average , the 21 moving average acted as the support which also indicates that the bullish trend in intact , after completion of the pullback the stock again shot up and resumed the bullish trend hence the bull flag pattern was completed , this chart is the daily chart but this pattern can also be easily seen on the 5 minute charts and the hourly charts .
One could have bought after the stock took support at the 21 day moving average and formed the indecision candlesticks this is suited for aggressive traders , more conservative traders can wait for the price to rise above the highs of the pattern for a confirmation that trend is indeed intact , this is more conservative way and should be generally avoided by traders who trade full time because it will reduce the risk reward ratio to a much greater extent.
Bull flag pattern in Asian Paints –
Above is the technical chart of Asian paints on NSE , the stock formed the pole and then the stock consolidated and formed the flag , also a bullish engulfing candlestick pattern was formed at the end and the stock of Asian paints continued the bullish trend , here the bullish engulfing pattern acted as the perfect signal for the end of the pattern and meant that the traders can go long at that level , in the example above the 21 day moving average acted as the support , in this example the bullish engulfing candlestick pattern was the signal hence many techniques can be employed to determine if the pattern has completed , moving averages , candlestick patterns , support resistances , Fibonacci retracements all these tools can be used in determining this.
The stop loss can be set 1 ATR below the lows of the flag part of the pattern , ATR is the average true range and tells the average volatility of the stock hence setting the stop loss 1 ATR below will ensure that you loose less and are even protected from stop hunting by algos or by institutional traders , placing stops at the lows of candlesticks or just near the support resistance will make them prone to stop hunting .
Final Thoughts –
As discussed above the logic behind this wonderful pattern is quite simple and this pattern can be a very good tool for any technical trader , just like any other technical chart pattern this wont always present itself in exact same bookish manner , above examples are the cherry picked examples to make you understand the logic behind the pattern and help you comprehend how you can use this in your day to day trading setups , the pattern might not always present itself in the exact bookish manner hence one needs to have experience and give time before the screen in order to develop the eye to catch such patterns easily with a simple glance , therefore analyze as many charts as you can daily , there is no shortcut to success .