To The Moon

What Bull Flag?

The bull flag is a clear technical pattern that has three distinct components: the flag pole, the flag, and the break of the price channel. Respectively, they show a strong directional trend, a period of consolidation, and a clear breakout structure. When put together, it can be a strong predictor of future price action.

Identify The Pattern

The most important part of the flag pattern is to identify a strong trend (in either direction, as the Flag may be inverted, triggering a bearish move!) Take a look at the higher time frames when you find a flag pole, to ensure the price is not simply ranging. It could be meeting a large area of resistance!

Protection

No trade should be entered without knowing its exit conditions, whether this is in the trade’s favor or against it. The stop loss is often placed at the breakout of the flag’s price channel. As traders wait for a candle close to enter the trade, this forms a slightly higher probability that the market will continue in your favor.

Confirm Or Not?

It may be tempting to try and guess the bottom of the price channel, and time the last bottom before the next impulsive jump. However, the market may simply continue the flag price channel for one more leg, or many more than one. This is why traders wait for the breakout in the flag pattern, rather than jumping in and making trades based on hope.

Not 100%

Even with a proper breakout of the price channel, this may cause the price to be exhausted and simply continue the immediate downtrend. (Possibly retesting the previous high before falling further). No matter how reliable a pattern in history, no strategy offers 100% confidence, and the markets will eventually break every rule, at some point.

So How?

The flag pattern is a frequent occurrence in the price action of all securities and can aid any trader who missed out on the initial move, letting them still capitalize on its bigger trend. Further, waiting for the end of the flag’s trend allows a greater risk-to-reward ratio and a greater probability of profit.

Levels trading using support and resistance is another good indicator to consider as well. We can see the area marked out in yellow as no interest zone. If the price action breaks down below 410.80, it willbe a good opportunity to consider put as the strong area of support is broken temporarily. Calls can be taken above 413 towards 415 before confirming the bull flag breakout indicated in the first chart.

As profitable traders know, it is important to consider various indicators or combine them for a bigger picture to lower the risk and maximise reward over time.

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