Speaking about technical analysis, you can notice that so-called flags are often mentioned - these models can significantly help in determining the direction of the course. A flag is a pattern that indicates short-term price movements within a parallelogram that are consistent with the previous long-term trend.
There are two types of flags, depending on the trend - bullish or bearish. And each has five main characteristics by which it can be identified: a “flagpole” (a strong previous trend), the flag itself (consolidation channel), trading volume, a breakthrough, confirmation of price movement in the direction of the previous trend.
Bullish flag - pattern features
A bull flag is a pattern in technical analysis that occurs when a currency rate consolidates after a strong uptrend within a downward channel at a lower level. When connecting trend lines, the pattern can be either a “wedge” or a “pennant”.
During consolidation, volume tends to decline. Thus, traders from the previous trend do not face urgency when buying/selling during the consolidation period.
FOMO ("fear of missing out") and investors' insistence on buying usually renews when the coin price breaks the upper limit of the bull flag trend and consequently trading volumes increase. Therefore, experts consider a noticeable increase in trading volume as a sign that the bullish flag has been successfully broken. Conversely, a fake bullish trend is more likely if trading volumes are low. In other words, the rate may fall below the upper trend line, nullifying the focus on a bullish rally.
The nuances of trading a bullish flag
A common tactic is to go long at the bottom of a bull flag with the expectation that the next leg of the rally to the upper trend line will trigger a breakout. However, if you do not want to take risks, then you should wait for actual confirmation of the breakout before opening a long position.
Speaking of target value, usually a breakout of a bull flag motivates the price to increase as much as the size of the flagpole from the bottom of the flag.
The image shows the Bitcoin price pattern from December 2020 to February 2021, where a bull flag breakout is clearly visible.
Just in case, a trader is recommended to set a stop loss slightly below the entry level. In this case, if the bull flag turns out to be wrong, possible losses will be significantly reduced.
Bear flag – pattern features
A bearish flag is the opposite pattern to the one described above. It shows an initial downward movement, followed by upward consolidation in the form of a parallel channel. Accordingly, a downward movement is called a flagpole, and an ascending channel is called a bearish flag.
It should be noted that a decrease in trading volume usually characterizes the formation period of this pattern.
The nuances of trading with a bear flag
In the illustration presented, you can see how to trade the pattern in question when it appears on cryptocurrency charts. In this case, the#BTCrate formed a flagpole, after which an upward pullback formed inside the growing parallel channel. As a result, the Bitcoin market rate left the channel range and headed down approximately to a height equal to the height of the flagpole.
The trader has the opportunity to use different options - for example, open a short position upon a pullback from the upper trend line of the flag, or be cautious and wait for the price to decline below the level below the lower trend line while simultaneously increasing trading volume.
Either way, the short-term goal is usually determined by subtracting the flag peak level from the flagpole height.
If the price has broken through the lower flag trend line, but trading volumes are low, this is a sign of a false bearish flag - the rate may push off from the line as from a support level, bouncing inside a parallel channel. For safety, the stop loss should be set slightly above the entry level.