Bull flag pattern

A bull flag is a short consolidation after a sharp advance. Buyers push price up quickly, some take profit, and price slips back a little while new sellers fail to take control. When the flag breaks to the upside, the earlier advance is read as resuming.

The name comes from the shape: a near-vertical pole with a small tilted rectangle at the top.

• Flagpole – a steep rise over a few candles, larger than the moves before it and usually on high volume.
• Flag – a narrow channel of small candles that slopes down, against the trend. Its highs and lows fit between two parallel lines. A flag can also run sideways.
• Breakout – a candle that closes above the upper line of the flag.
• Target – the length of the flagpole added to the breakout level.

• Start from the pole. Without a fast, clear advance the pattern is an ordinary pullback.
• The flag is small compared with the pole. As a rule of thumb traders want it to give back less than half of the pole.
• The flag is short. On a daily chart it usually lasts from a few days to about three weeks. A consolidation that drags on stops being a flag.
• Volume fades while the flag forms and returns on the breakout.
• Draw the flag with the channel tool or two trend lines through its highs and its lows. Replay on Charts then steps forward candle by candle and shows where the breakout and the stop would have been.

• Entry – on a close above the upper line of the flag. A more conservative entry waits for a move above the top of the flagpole.
• Stop – below the low of the flag. If price returns into the channel and breaks its low, the pattern has failed.
• Target – measure the flagpole and add it to the breakout price. A rise from 52 to 84 is a pole of 32 points; a breakout near 78 gives a measured target of 110. It is an estimate, not a level price has to reach.
• Position size – set it from the distance between the entry and the stop.

• Bull flag – forms in an uptrend. The pole points up, the flag slopes down, the breakout is to the upside.
• Bear flag – forms in a downtrend. The pole points down, the flag slopes up, the break is to the downside.
• In both, the flag moves against the pole, and the pole length gives the target.
• A flag that slopes in the same direction as the pole is not a flag. It is closer to a wedge or a slowing trend.

A bull pennant is the same idea with a different shape. After the pole, price contracts between two converging lines and forms a small symmetrical triangle instead of a channel. It is traded in the same way: entry on a close above the upper line, stop below the low of the pennant, target equal to the pole length.

• Buying inside the flag – until price closes above the upper line, the pullback can keep going.
• Calling a deep pullback a flag – a retreat that takes back most of the pole shows that sellers are in control.
• Ignoring the wider picture – a flag directly under strong resistance on a higher timeframe has less room to run.
• Chasing a late entry – after a long breakout candle the stop is far away and the trade no longer pays for its risk.
• Trading the third or fourth flag in a row as if it were the first – late in a trend each new flag is less reliable.