A simple guide to trading with a bear flag pattern
So you have been trading for a long time, and you have heard other traders mention the Bear and Bull flag pattern. You have also seen traders earning some handsome profits while using them, as well as some traders losing a major part of their portfolio.
So in this article, let us explore how you can trade using the bear flag pattern.
Now, without further ado, let us dive into it.
So, what is a bear flag pattern?
A bear flag pattern is an aggressive movement of prices to a lower circuit, followed by a slight upward or parallel movement of prices. The aggressive downward movement of the price is called a flagpole. The upward or the parallel movement of the prices is the flag of the pattern.
Traders should note that a Bull Flag pattern is the opposite of a bear flag pattern. The appearance of both the trade pattern helps us understand the continuation of a trend.
When to trade the bear flag pattern?
One of the first methods of trading we all have learned is to trade using the support and resistance levels. You can buy as soon as the price crosses the resistance level and sell when the price crosses the support level.
This method is simple, but it has two major flaws.
- You are already selling when the price has touched its lower circuits. So you risk selling at the lowest price of the day.
- The risk to reward ratio in this kind of trade is very high.
To avoid these two flaws, traders should use the bear flag pattern to give them clear entry and exit points. Thus eliminating a lot of guessing and the risk of a trade. Along with that, using the bear flag pattern gives a good return when traded properly.
Trading strategy of a bear flag pattern
Now you know what a bear flag pattern is and when to trade using it. Let us see a five-step guide on how to trade using it.
Step 1: Identify the Bear flag pattern.
This heading is self-explanatory. Identify the bear flag pattern before jumping into the trade. Along with that, the right price structure should line up with the flag’s appearance. The bear pattern appears when there is high selling pressure. So, keep out for the imbalances in the price’s volume.
Step 2: Recognize a narrow price action movement.
The price formation should move in a narrow range between the support and the resistance levels. Clearly, this shows an aggressive price movement of the stock and an indicator of higher selling pressure.
Step 3: Sell at flag breakout.
The appearance of a bear flag pattern is just half of the story for identifying the continuation of a trend. We need confirmation that the price trend will continue. For that, we use the price breakout and movement of price after a flag formation.
When the price breaks after the flag formation that is your cue to sell the stock.
Traders should note that some aggressive traders sell their stocks at the top of the flag pattern. It gives them even bigger profits. Other conservative traders sell after the appearance of confirmation, as this is a safer method.
Step 4: Place stop-loss
Traders should keep in mind that sentiments run the market, and anything can happen at any given moment. So it is better to play it safe and put some stop-loss. We suggest that you put stop loss at the top of the flag.
Next step, you will learn when to book your profits.
Step 5: Book Profit
Obviously, this is the part for which all of you have been keenly waiting. The best price to book profit is when the price movement is equal to the height of the flagpole. Thus giving you a good profit without the risk of wiping out all of your gains.
There you have it. Everything you need to know about trading using the bear flag pattern. But remember that this is a template of how traders should use the bear flag pattern. So before entering a trade, verify your theories with other indicators.