FLAG PATTERNS & PSYCHOLOGY BEHIND BULL AND BEAR FLAG FORMATIONSHi everyone and Good morning. Welcoming you back (after 18-week break)
Thanks for your like and supports.
This is Part 3 of my Technical Analysis series of CHART PATTERNS
BULL AND BEAR FLAGS
Now, for those meeting the words BULLS and BEARS for the first time, these are terms used to describe the buying and selling action of traders
BULLS generally refer to the price action of buyers as they drive Stock PRICES UP, while BEARS refer to the selling action of sellers as they drive stock PRICES DOWN.
For starters, let’s define what a Flag pattern is:
A flag pattern is a TREND CONTINUATION PATTERN . It is named a flag pattern because its formation resembles a flag on a flagpole.
The pole is usually the result of an almost VERTICAL RISE IN PRICE, and the flag part results from a PERIOD OF CONSOLIDATION
When the price breaks out of the consolidation range, it triggers the next move higher.
Flag patterns can either be BULLISH or BEARISH.
Follow me closely, as We will now look at BULL and BEAR Flags in turn:
BULL FLAGS
Bullish flag formations are found in stocks with STRONG UPTRENDS.
They look something like (sketch 1 on chart)
As can be seen on the sketch 1 chart above, the pattern starts with a STRONG, ALMOST VERTICAL price spike, that eventually start losing steam forming an orderly pullback where the highs and lows are parallel to each other forming the FLAG in the form of a tilted rectangle.
The tilted rectangle (flag) usually breaks to the upside resulting in another powerful move higher, usually measuring the length of the prior flag pole (Let’s consider the sketch 2 chart)
Now let’s look at BEAR FLAGS :
The bear flag is an upside-down version of the bull flag. It has the same structure as the bull flag but inverted. looks like sketch 3
As can be seen above, the flagpole forms from an ALMOST VERTICAL price drop, which is followed by a period of consolidation, with parallel upper and lower trendlines forming the flag.
A break of the support structure of the flag, results in another move lower, with the same length as the prior pole.
Just as with any Chart pattern, there is usually psychology behind its formation.
Let us look at the
PSYCHOLOGY BEHIND BULL AND BEAR FLAG FORMATIONS:
On bull flags, the bears (short sellers) get blindsided due to complacency as bulls (buyers) charge ahead with a strong breakout causing bears (short sellers) to either panic and cover their ‘shorts’; or add to their ‘short’ positions.
Once the stock is in the consolidation stage, the bears (short sellers) regain some confidence and they add to their ‘short’ positions with the expectation of a price drop; only to get trapped again when the price break to the upside causing short sellers to cover their ‘Shorts’ thereby driving prices even higher
Since some short-sellers from the initial flagpole run up may still be trapped, the second breakout forming through the flag can be even more extreme in terms of the angle and severity of price move.
That is precisely the psychology behind BULL FLAGS; and that same psychology applies on BEAR FLAGS, just in reverse.
Now let’s consider the sketch 4 on how we can make money from bull and bear flags:
On a bull flag, you typically want to enter a Long trade on a breakout to the upside. Take profit target should be the same length as the prior flagpole. Stop loss should be placed just below the broken resistance line, which will now be acting as support.
I will leave it here for this week, that’s all I had in store for you. Follow me And JOIN me again next week as we will be talking about another Chart Pattern that works.
Until then, here is to Profitable trading!
