What Is a Bear Flag Pattern and How to Use It?
By Space Coast Daily // April 27, 2021
The bearish flag is a candlestick chart pattern that indicates that the downtrend will resume after the brief break is over. The bear flag pattern, as a continuity trend, aids sellers in pushing the market action lower.
The market activity consolidates inside the two parallel trend lines in the opposite direction of the downtrend after a heavy downtrend. The bear flag pattern is triggered when the supporting trend line is disrupted and the market movement begins to trade lower.
We’ll take a glance at what a bear flag is, how it’s made, and what its main advantages and disadvantages are in this blog article.
How Does a Bear Flag Pattern Work?
About the same way as a bull flag has a flagpole and a flag; a bear flag has a flagpole and a flag.
After price activity trades in a downtrend, allowing lower highs and lower lows, the former is created. As soon as the new low is established, the market action begins to rise as the sellers take a rest. Unlike the bearish pennant (continuation pattern), where consolidation is formatted in a wedge or a triangle, this consolidation occurs within a parallel channel.
The buyers are attempting to disrupt the momentum of the sellers, who are in charge of the market action, by consolidating. On the other hand, the bears take a step back to stabilize recent advances and brace for a new downward drive. This period of consolidation does not last too long. The recovery can be sharper or milder depending on the severity of the downtrend.
Besides, the recovery does not exceed the flagpole’s 50 percent Fibonacci retracement. A pullback could end at about 38.2 percent Fibonacci retracement in a textbook case. The bigger the downtrend is, and the stronger the breakout is expected, the quicker the recovery.
How to Recognize the Bear Flag Chart Pattern
The bear flag, as previously said, is a bearish continuity trend. Looking for a downtrend is the first move in seeing a bear flag. The rebound can then occur inside an ascending channel, whereas the extent of the adjustment is monitored.
For the bearish flag to appear, these three components must be present:
The flagpole is when the commodity price would exchange lower in a succession of higher highs and higher lows.
During an uptrend, a convergence of two parallel trend lines is required;
A breakout occurs when the supporting trend line is broken, indicating that the pattern has been activated.
Pros and Cons of Using Bear Flag
As previously stated, the bear flag is a continuity pattern that allows for a lower extension. As a chart pattern, the bear flag ensures that traders can recognize the level of the downtrend in which they are currently trading.
More specifically, the flag would indicate when the consolidation process has ended as the sellers’ pressure increases. The bear flag is regarded as a good technical pattern in general. 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.
The obvious flaw is that the restructuring process could lead to a shift in trend direction. 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.
How to Trade the Bear Flag Pattern?
The same rules that we use for selling other candlestick patterns adhere to trading the bearish flag. After spotting the flag, we go into a wait-and-see mode to see if the supportive trend line can be broken. Often traders are overly quick to reach the market and often “jump the trigger” before the real breakout. As a result, keep in mind that the trend becomes “active” when the breakout occurs.
The take profit level is studied by calculating the flagpole’s length. The trend line is then copied and pasted, beginning when the breakout happened and finishing at a stage where, if the opportunity occurs, we should start booking profits.
Overall, you can apply this pattern to all financial markets. It gives traders entry, stop, and limit levels, and the risk-to-reward ratio is beneficial. One downside is that the multifaceted nature of the bear flag pattern can be a challenge for new traders to understand. When any of the bear flag’s distinctive formation characteristics are followed, it is considered an exceptionally reliable price trend.