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Intermediate

Have a basic understanding of Forex, but not sure how to level up? We have got you covered.

Have a basic understanding of Forex, but not sure how to level up? We have got you covered.

Bullish and Bearish Flags

Flag patterns in Forex trading are crucial for technical analysis.The flag patterns identify the continuations of previous trends from a point at which the price swayed away against the same trend. They can help determine whether the trend should resume, how rapid a price increase is and what is the right time to trade.

Each chart or flag pattern gives the trader a piece of unique information about the particular currency pair and its potential price movement, which can in turn help them make informed decisions.

The Forex flag pattern is a graphical representation that appears like a slight consolidation between impulsive legs of any particular trend. When this pattern appears on a chart as a pictorial representation, the price action mostly breaks out in the exact direction of the ongoing movement.

Why is it essential to study flag patterns in Forex?

By studying and understanding these flag chart patterns, traders are able to confirm price trends, decide their entry points, and exit as per their trading capacity. This strengthens a trader’s technical analysis that is highly accurate in predicting prices and exchange rates of currency pairs. The flag pattern consists of two main parts:

The flag pole: The flagpole is the vertical line that represents a trend impulse. Every trending move has the capacity to transition into a flag, depicting that every trend impulse can appear to be a flagpole. The most significant impulse move is the flag pole, followed by a brief consolidation that seems like a flag.

The flag: After the pole, a flag pattern then begins to form with the commencement of a trade within a tight range. This upward and downward movement of price fluctuations takes the appearance of the flag/flag body. It consists of price actions which are evenly distributed as tops and bottoms.

There are two major types of flag patterns:

1. Bullish flag

A bull flag is basically a continuous pattern that appears as a brief pause in the trend by following a strong price move, moving higher. It looks like a download sloping rectangle, often represented by two parallel trend lines against the ongoing trend lines. During this period that we also call consolidation, volumes mostly dry up through its formation and push the pattern higher on the price breakout.

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Identifying a bullish flag in Forex trading

The bullish flag pattern has several components. Hence, at times it can be complex to identify it on a Forex chart. Traders need to identify and understand these components closely in order to be able to locate a bull flag as soon as it appears on the Forex charts the trade this pattern successfully. significant things to look out for in a bull flag pattern are:

A preceding uptrend with the flag pole

A downward sloping consolidation

The retracement of the flag pattern should end at less than 38% of the original trend. Otherwise, it may not be considered as a flag pattern.

The price generally breaks higher, with a length that is equal to or greater than the flag pole’s size.

Reliability:

When all components of the flag pattern are correctly identified and present within the chart, this particular pattern is considered as an inspiration to trade and make informed decisions.

Advantages:

Works in all the financial markets and not just Forex

Patterns help in determining exit and entry points

Great risk-reward ratio

Disadvantages:

Complicated to be understood by novice Forex traders

Not all signals work all the time

Difficult to distinguish from the regular rectangle pattern in the chart

2. Bearish flag

A bear flag is a technical pattern that gives an extension to an existing downward trend. It can also be called the mirror opposite of a bull flag. The formation is underlined from an initial directional move that points downwards the ground, which is then followed by a consolidation in an upwards direction. The downward movement here is considered as the flagpole, while the consolidation is the remaining flag body.

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Recognizing a bearish flag is not that complicated, especially when you understand its components and what a bullish flag is. The pattern can be divided into 3 main parts, namely :

Traders need to find the flagpole, which can be identified as a steep initial decline. It can also be a slowly sloping decline that establishes the basis of this flag trend.

The bear flag is then identified as the represented period of consolidation that occurs after completing the initial decline of the prices. Prices may slowly go in the upward direction during this period and retrace some portion of the initial move. Then, the traders need to wait for a price break lower than the already lowered lows, in the same direction of the trend.

Once the prices fall further, this is the point where traders find their final component to identify a bearish flag pattern. The profit target is the potential value from a currency pair’s subsequent decline in the price. The pricing can be recognized by measuring the distance in pips of their initial decline. This value is then subtracted from the peak resistance line from the consolidating flag to identify the potential profit.

Identifying a bearish flag in Forex trading

A preceding downtrend with the flag pole

An upward sloping consolidation

The retracement of the flag pattern should end at less than 38% of the original trend. Otherwise, it may not be considered as a flag pattern.

Look for price breaks lower than usual, equal to the flag pole’s length.

Reliability:

Bear flags are considered as an extremely reliable price pattern when all their unique formations are correctly identified and measured.

Advantages:

It can be applied to all the financial markets and not just the foreign exchange market.

Provides traders with the entry, exit, stop and limit levels.

Favorable risk-reward ratios.

Disadvantages:

Just like the bull flag, it’s only drawback is that it is a multifaceted pattern that can be challenging to be understood by novice traders due to its complexity.

Conclusion

Both bear flags and bull flags are represented in the same way in the same chart pattern. They are reflected in the opposite direction marking a downward or an upward slope, respectively. Strategies followed by traders to profit from these projections are similar in nature but involves a superior understanding of these patterns.

A trader must ensure not to confuse bearish flag patterns for bullish breakouts. Bearish flags are a gradual rise in the price in downward trends, whereas bull breakouts are sharper moves in the upward direction. Opting for the right Forex trading platform can help you identify these patterns in the right way and make profitable traders.

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