Last Updated on: 13th February 2021, 04:52 pm
The flagpole forms on an almost vertical panic price drop as bulls get blindsided from the sellers, then a bounce that has parallel upper and lower trendlines, which form the flag.
The initial sell-off comes to an end through some profit-taking and forms a tight range making slightly higher lows and higher highs.
This illustrates that there is still selling pressure present although traders are also entering long positions looking for a reversal and this forces price to drift in an upwards direction.
During the consolidation, traders should be prepared to take action should price break down through the lower range level and/or make a new low as this indicates the bears are in control again to force another sell-off.
The success of a bear flag can be greater after a significant downside move due to the possible increase of overhead resistance.
Bear flags can be stronger when the swing low that begins the pattern is also an all-time low due to the possible lack of underlying support.
The bull flag is an upside-down version of the bear flag.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.