Today, you’ll learn how to measure a bull flag effectively. In fact, in a trading bull flag, you can catch a breakout in the stock market to earn significant amounts.
We usually find a bull flag in strong uptrends, and there is a high probability that the price of a security will go up. It may appear in a downtrend. However, the pattern is not usually reliable if it is the case. Do you know how to measure a Bull Flag?
Get the length of the flagpole to measure a bull flag. Add the same distance to the bottom of the flag to get the maximum expected move of the price of the stock.
The real question is, how do we use the bull flag. You can find a lot of tutorials on the web, but do the strategies work?
To know what does a bull flag looks like, you can look at the picture below.
We already know that a breakout from the flag makes traders more interested in the stock. However, you need to predict where the price might move.
In this bull flag pattern target, you are using the flag pole as your target to set your minimum target.
Also, you need to set your profit targets as close to maximum as much as possible. If you read my answer above, you probably know how to measure it.
But if you want to know more, you can continue reading.
In this post; you will learn how to trade the bull flag.
- What is a bull flag?
- When to trade?
- When to enter?
- When to exit?
I will keep this guide simple so that you will learn the ins and outs of the bull flag pattern.
What is a bull flag in trading?
A bull flag pattern is a chart pattern in technical analysis that resembles a flag, and when found in an uptrend, it usually is an indicator of a high uptrend momentum. The confirmation of momentum occurs when there is a breakout at the upper resistance of the flag, price pattern.
The bullish formation has two essential elements, and these are the flagpole and the flag.
The pole has risen quick because of strong momentum, and then the flag forms due to profit-taking.
It is pretty basic, and you might say that is obvious. However, if you trade every flag, you’ll lose your account faster.
In this bull flag strategy, select a strong stock only to avoid false signals.
You might think it is easy to trade the formation, but it is difficult to do in real time.
In bull flag trading, this pattern requires a lot of screens time and practice. However, you can use our bull flag stock screener if you want to automate the process.
You can download the Amibroker AFL by clicking on the screener link above. Also, there is a tutorial to scan it using the software.
Traders buy at the break at the top of the bull flag stock, and they hit the buy stop to catch the breakout.
However, I don’t do what other traders do. After the breakout, I wait for a small pullback to avoid a false breakout.
Well, I do it to reduce my losses in case the market moves against me.
The Bull flag target is a target measured using the length of the pole of a bull flag. It is the price point where traders often exit half of their positions while managing the other half of the trade. For example, they will reduce 200 shares owned to 100 shares at the target price.
Bull flag breakout target
As a general rule, the bull flag breakout target is the same as the length of the flagpole. Although the target can be more than that, it is also important to close half of the trade to avoid losing in a pullback.
Sometimes, the market will have to pull back due to profit taking. To avoid getting caught in the middle, traders should take their profits when the length price reaches the level as the length of the pole.
Another way of looking whether there is a weakness in the bull flag is looking for a bear flag at lower time frame when the price is within the target.
The price target, if reached, should be a signal to close half of the positions.
When to trade?
Do not take every bull flag you find and always check if the channel pattern has a firm foundation.
The channel pattern is the up and down price movement inside the flag.
The stock must trend upward, and if there is no base, just ignore it for your safety.
We have designed the bull flag screener on our website to find only strong stocks. You can use it if you like.
We created the AFL to select only those stocks that have increased by 25% in the last 20 days.
You can download the code at our screener page and look at how we find a bull flag.
If the stock does not have a firm foundation, the momentum may stop.
Most traders fail because of being impatient. You probably took a lot of bull flag trade without a firm foundation.
How did it turn out?
Did the trade fail?
If you didn’t, I would congratulate you.
Always remember that a bull flag is a trading pattern. These flags may show up many times in a bear market.
Look at the broader picture. Ask yourself, what is the trend of the market before the bull flag formation appeared.
You should only consider the bullish flag if the trend line is up to avoid a false breakout.
When to enter?
Bull flag trading is a method of trading that usually requires experience when deciding when to take entries at the breakout. The trading entries are often decision from high to low-risk entries.
There are three possible entries you can take when trading a bull flag.
- Entry at the break above the flag.
- Entry at the time of the pullback after the breakout
- The entry below the top of the flag.
A bullish flag breakout happens when the price of the security breaks the resistance (Top of the bullish flag). It is usually a sign that the asset’s price has a high probability of going up in a short period. Because we expect it to go up, traders can have three entry decisions.
Buying at the time of the breakout has a high level of risk of a fake breakout.
In this bull flag formation, I don’t enjoy buying at the breakout to reduce the level of risk.
I don’t want to be trapped in this kind of situation. However, if I see that the momentum is excellent, I will take the risk, anyway.
The stock price may go down, and it may stay inside the flag for a long time.
I usually buy after the pullback from the breakout. A lot of times, I trade, but it’s okay because I would rather have a confirmation.
If I am not confident that the price will continue moving up, I will not buy the stock or close my existing positions. E.g. After a price break, there is no formation of higher high.
It is just my preference, and it is my trading style. If you want to follow my method, backtest it, and let me know the results.
Buying in anticipation of a breakout has an edge. If you see the price bouncing at the resistance, and the MACD bars are small, take the trade.
Small MACD bars signify that something did not yet stretch the price out. Also, it means that there is room for the upside.
However, if the bars are huge, the price may be at the extreme, and it can pull back again.
I just spilled out my secret in using the MACD indicator.
Later on, I will share with you the secrets of MACD, and it will amaze you how we can use it in trading breakouts.
The bullish flag pattern may transition to Pennant Pattern when the consolidation period becomes longer or looks like an ascending triangle.
When the transition happens, the price can breakout either to the upside or to the downside.
This breakout is usually a high probability trade, if one looks at the preceding trend.
The preceding trend can help predict the direction of the breakout.
When to exit?
I set the stop loss below the flag or lower trend line of the consolidation pattern. If the price hit it, I immediately sell.
You should always follow your plan, or you are to lose a lot of money.
Do not average down, and always get out of the trade if in case the market is against you.
I take profit at the same length as the pole. When I trade a bull flag, I hold it until I hit the target.
Always measure the flagpole and use it as your profit target.
Sometimes, I don’t get my target because I also use a trailing stop to manage my trades.
I hope you learned something today about a bull flag.