What Is a Bear Flag Pattern? How to Use it to Trade Crypto Effectively

The bearish flag pattern has some similarities with the Rectangle Chart Pattern. The difference is within the rectangle pattern, the price action is moving horizontally in a much bigger trading range. One way traders try to get into the trend is by waiting for the consolidation to break. In a bullish market, you expect the breakout to be upward to continue the upward movement. In a bull flag formation, traders will hope to see high or increasing volume into the flagpole . The increasing or higher than usual volume accompanying the uptrend , suggests an increased buy side enthusiasm for the security in question.

The patterns also follow the same volume and breakout patterns. The patterns are characterized by diminishing trade volume after an initial increase. An example of a bear flag chart pattern can be seen in Ethereum from mid-March to early April 2020. ETH formed a bearish flag pattern, having made a sharp sell-off from $200 to $160. For people looking to short an asset, the downside must be managed in case the asset price goes up significantly, and the market reverses.

Bearish Flag on Crypto Charts?

The often high volatility that comes with the cryptocurrency market also makes the strategy fallible. Trades in a bear flag formation will look for high or rising volume on the flagpole. Conversely, the downtrend’s increasing or above-normal volume shows that the sell side is becoming more enthusiastic about the in-focus cryptocurrency. This is the point at which, after a strong move in price, the market consolidates for a period of time.

If the pattern is close to the MA, you can trade the bear flag. In this blog post we look at what a bear flag is, its structure, as well as its main strengths and weaknesses. Furthermore, we will also share a simple trading strategy to show how to trade a bear flag and make profit. There are different options for opening a position and managing the downside, depending on the trader’s overall philosophy and trading strategy. Low volume into the flag and high volume into the flagpole indicate that the market’s overall momentum is unfavourable.

Bear Flag Chart Pattern: A Real Example on Forex

Depending on the general trading strategies of the trader, as well as their trading thesis on the asset, they could put the buy stops in different places. A more conservative trader might put a buy stop near the resistance line to get them out of the trade as soon as there are significant upward trends. Different traders and brokerage professionals will have different theories about when to open a long position when they spot a bear flag in an extended downtrend. A more aggressive trader might open the trade near one of the peaks and close to the resistance level. This would indicate that the trader is certain there will be a break to the downside.

Traders of a bear flag might wait for the price to break below the support of the consolidation to find short entry into the market. The breakout suggests the trend which preceded its formation is now being continued. Traders of a bull flag might wait for the price to break above the resistance of the consolidation to find long entry into the market. The bull flag, on the other hand, forms in an uptrend, where you would see a price rise followed by consolidation and then the breakout to continue the uptrend. In a bearish flag pattern, the volume does not always decline during the consolidation.

How to Trade a Flag Pattern

That being said, a sound and well-executed strategy based on the identification of flag patterns with proper risk management will benefit your portfolio in the long run. Identifying the bear flag pattern should be an easy job but if you have the right trading conditions the bearish flag can be a great trading pattern to start growing your account. The key thing about the bear flag chart pattern strategy is that it’s a strategy that works only in a bear market and it works beautifully.

• In this technical analysis we are reviewing the price action on Ethereum.
• The bear flag formation offers trades with promising risk-reward ratio and clear entry and exit points.
• The high volume confirms the breakout and suggests a greater validity and sustainability to the move higher.
• The basic method of trading breakouts of support and resistance levels is to sell as soon as we break below support and buy as soon as we break the resistance level.
• The first entry is on the flag break and the second potential entry is on the break of the high of the flagpole.
• The strong down move is also called the flagpole while the consolidation is also known as the flag.
• In the strategy section, you will learn to filter out good setups from the crowd by addition of confluences.

Your Take-Profit level should be equal to the difference you counted at the second step. Although https://www.bigshotrading.info/ the pattern seems simple, the key to a successful trade is to identify it correctly.

How Do You Trade a Bear Flag?

As with all forex strategies and indicators, bear flag formations have a unique collection of pros and cons. Ultimately, it’s up to each trader to decide if bear flags are suitable for use in the market. Identifying the Bear Flag Pattern in real-time is a straightforward process. Follow the steps below to spot bear flags on your forex price charts. The bear flag is a signal of market consolidation that occurs within a downtrend. Visually, it appears as a sharp bearish price break, followed by a period of horizontal or “sideways” price action. As you can see in the USD/CAD chart below, both the flag pole and flag are apparent.