One of the most tested, popular and effective trend-trading setups is the flag pattern. When the market is trending down a trader is looking for a bearish flag pattern and when the market is trending up, the trader wants a bullish flag pattern. 

Bulls Flag vs. Bear Flag

When the market is trending, traders are looking to “ride the trend”. The way to do that is to find a continuation pattern. A bull flag is a continuation pattern for when the market is trending up and a bear flag is a continuation pattern for when the market is trending down. 

Even when the market is clearly trending, it never moves in one direction only. A trending chart is a series of impulse moves and pullbacks. The big jumps in the market are the impulse moves that either start a trend or continue it. But “what goes up eventually has to come back down”, and the market typically retraces part of the move before continuing in the trend’s direction. 

The trick to trading the bull flag or the bear flag is to wait for the pullback to come to an end and trade the continuation of the trend. 

Bull Flags

Although flag patterns come in all different shapes and sizes, every flag pattern has two parts: a flagpole and the flag. There are three main types of flag. In a bullish chart, the three main bull flags are:

1. A bullish range flag.
2. A descending channel flag.
3. A bullish wedge flag.

1. Bullish range flag: Notice how the old price action on the left looks like an ascending pole. That is the impulse trend of the market. The price then begins to range sideways before it continues moving upward. That is the flag that signals a temporary pause in the upward trend. Once the price action breaks past the range’s resistance and continues higher, that's the signal to hit buy in continuation of the trend. 

2. The next bullish flag is the descending channel flag: Here we have another ascending flagpole on the left but this time the pause in the uptrend is more drastic, as we start to see lower highs and lower lows. But with the lower highs and lower lows, we’re still noticing a symmetrical channel that's descending. This descending channel is the flag. Once the price action breaks up past the resistance of the channel, we have a signal to hit buy in continuation of the uptrend. 

3. Finally, we have the bullish wedge flag. In this pattern we will notice the same impulse move upward, which is represented by the ascending flagpole. Then price action pauses and starts to cluster, seemingly unsure if it will go higher or lower. In the wedge, the highs are getting lower and the lows are getting higher. This type of price action is a sign of building pressure. Once the price action breaks upward, we have a signal to buy in continuation of the trend. 

Bear Flags

Now let's examine bear flags. There are three main types of bear flags:

1. A bearish range flag.
2. An ascending channel flag.
3. A bearish wedge flag.

1. Bearish range flag: Notice here how the old price action on the left looks like a descending flagpole. That is the impulse down-trending move of the market. Then price action starts to range sideways before it continues moving downward. This range is the flag that signals a temporary pause in the downward trend. Once the price action breaks past the range's support and continues lower, we have a signal to hit sell, in continuation of the trend. 

2. The next bear flag is the ascending channel flag: Here we have another descending flagpole on the left, but this time the pause in the downtrend is more drastic, as we start to see higher highs and higher lows. But with the higher highs and higher lows, we’re still noticing a symmetrical channel that's ascending. This ascending channel is the flag. Once the price action breaks down past the support of the channel, we have a signal to sell in continuation of the down-trend. 

3. Then we have the bearish wedge flag. In this pattern we have the same impulse move down that is represented by the descending flagpole. Then the price action pauses and starts to cluster, not sure if it will go higher or lower. In the wedge, the highs are getting lower and the lows are getting higher. This type of price action is a sign of building pressure. Once the price action breaks downward, we have a signal to sell if the trend continues. 

It’s important to note that a setup always needs a confirmation signal. In other words, even after identifying a flag pattern a good trader has a signal - either a specific candle or maybe a set of candles - that he's looking for before executing the trade.

How to trade the Bearish Flag Pattern 

Take a look at this bear flag on the Daily chart of the EUR/USD: Notice the flagpole and the channel. Note how the last 4 candles in the channel before the price action continued downward were all small candles. The market was clearly indecisive for those last four days before it broke out. That “pressure” might be a signal for a trader that the channel is coming to an end and the market will continue downward. 

What is a Bullish Flag

Here’s another example of a bullish descending channel flag from the CAD/JPY 5M chart. Here again you see the ascending flagpole followed by the descending channel flag and then the breakout:

Let’s take a closer look at the breakout and we can see some clues of it coming. Notice how the lows in the channel were ascending. Then there was a big wicked candle showing bullish pressure. After that wick, there was clear indecision in the market right at the top of the channel followed by the breakout. 

Identifying these patterns is the first step in trading them, but for a higher winning percentage a trader wants to find clues and signals within the candles themselves to give himself a better edge. 

We hope this lesson in bull flags and bear flags helps you develop that edge you’re looking for. Always remember that the trend must take a pause before continuing. Successful traders don’t chase the trend but wait for pullbacks. Then they identify patterns, like these flag patterns and finally they see a confirmation candle, or set of confirmation candles, before triggering and opening their winning positions. 

Happy trading!