Bullish and bearish flags are some of the most popular chart patterns among forex traders. The flags are quite easy to recognize on the charts, and understanding the concept of trading with these patterns is simple.
If you are new to bullish and bearish flags, you might want to trade them first on a demo account.
The flag patterns are continuation patterns, which means the price enters a brief consolidation period before it continues in the trend direction. Traders would expect to recognize bullish flags on up trends and bearish flags on down trends.
The flags formations are similar to pennant chart patterns, which form triangles and are considered continuation patterns as well.
How to trade flags
When price is moving in a trend, you often see pullbacks in the opposite direction of the trend. These are consolidation periods where the bulls or bears are taking a breath before jumping into action. The bullish and bearish flags are exactly these consolidation periods before the trend resumes.
When you draw the flag pattern on your chart, you wait for the price to breakout before you open a long or short position. You are measuring the price range on the stick of your flag to project the possible future price movement. That move might happen on the same day or not until the end of the week. It is also possible that it might not happen at all.
In our bullish example, you can see USDJPY is moving upward, then the bullish flag (in purple) changes direction for a brief period. After a breakout from the flag, the price continues north. The measured distance is about 80 pips, and it took quite long to be projected on the chart.
In our second example, you might notice three bearish flags where the price consolidates before it resumes the downward move. We have shown the bearish flag in the middle (in purple) where USDJPY changed direction and retraced 50% before continuing south. The measured distance is about 50 pips and was projected on the same day.
As you have noticed, the flag chart patterns are easy to draw. They clearly look like flags, but you might also see them as golf sticks. More important is to understand how to measure the price range, which will help you set up your profit target.
The measured price range will help you place a Take Profit level for your position, but you will also have to consider where to place your Stop Loss. As with any price action trading, when trading flags, you need to be prepared for stopped out trades.