This is especially the case when the retracement ends at around 38.2%, creating a textbook https://www.bigshotrading.info/. Therefore, its greatest advantage is that it offers a very attractiverisk-reward ratio, as levels are clearly defined. The apparent weakness is that the consolidation phase may result in a change of the trend direction. Sellers may lose momentum as the consolidation drags on, while the buyers may grow in confidence that this current phase is not a consolidation, but rather a reversal.
If the consolidation continues, sellers may lose steam, while buyers may gain hope that this is not restructuring but rather a turnaround. As a result, flags with lengthy and choppy consolidation periods and those that stretch higher than 50% should be avoided. More specifically, the flag would indicate when the consolidation process has ended as the sellers’ pressure increases. This is particularly true as the retracement comes to an end at about 38.2 percent, forming a classic bear flag sequence. As a result, the biggest benefit is that it has a very appealing risk-reward ratio since the thresholds are well defined.
What Are The Pros And Cons Of The Bear Flag Pattern
The bearish flag is a candlestick chart pattern that signals the extension of the downtrend once the temporary pause is finished. As a continuation pattern, the bear flag helps sellers to push the price action further lower. After a strong downtrend, the price action consolidates within the two parallel trend lines in the opposite direction of the downtrend. Once the supporting trend line gets broken, the bear flag pattern is activated as the price action continues trading lower. In this blog post we look at what a bear flag is, its structure, as well as its main strengths and weaknesses.
- In this comprehensive guide, we’ll explore the bearish flag pattern, uncovering its characteristics, formation, and implications.
- The initial sell-off comes to an end through some profit-taking and forms a tight range making slightly higher lows and higher highs.
- Once the new low is in place, the price action starts to rebound higher as the sellers take a breather.
- When the market is “overstretch” (or far from the Moving Average), you don’t want to short the Bear Flag pattern because the price is likely to reverse higher.
- The strong down move is also called the flagpole while the consolidation is also known as the flag.
- Often when you short the Bear Flag, the price is usually below the 20MA.
Below we will consider the most popular and convenient trading systems for the bear flag pattern trade. The bullish flag warns traders about the uptrend continuation and gives a signal to enter a long trade. The bear flag, on the contrary, indicates the continuation of the downtrend. When analyzing the price chart, there are other price action patterns that work great in combination with the flag pattern.
What are bull and bear flag patterns?
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. Research suggests that the bear flag pattern has a 67% success rate percentage – making it one of the more reliable chart patterns.
This should not only give the fib retracement levels but also the fib extension levels. There are three potential price target levels indicated by 1.27, 1.414 and 1.618 fib extensions, which each double as a potential price reversal zone (PRZ). The below chart highlights an upside breakout from a bull flag pattern, which is accompanied by a high-volume Bear Flag Pattern bar. The high volume confirms the breakout and suggests a greater validity and sustainability to the move higher. The key difference is that bullish flags signal that an uptrend will continue. Just like with their bearish counterpart, it is important to note that these chart patterns only give reliable signals when they occur during clear trends.
