What is a bull flag pattern in crypto trading?
The use of chart patterns in the crypto market
Chart patterns are popular tools used by traders to predict changes in direction of asset prices and refer to a subset of technical analysis. Traders use chart patterns alongside horizontal levels of resistance or support and indicators to predict future price movements and momentum of prices.
Within the crypto sphere, technical analysis is a well-known category of the crypto trading methodology. A broad number of crypto traders read trading charts and patterns to spot entry and exit points for their transactions.
To learn more about reading chart patterns in the crypto market, why not read this article: 'How to read crypto trading charts & patterns'.
Keep in mind that nothing in this article is intended as or shall be understood as financial advice. When dealing with financial markets, either traditional or crypto, it is important to demonstrate a high level of financial responsibility and do your research as well as consult a professional.
What is a flag pattern?
A flag pattern refers to a price pattern that is made of two parallel trend lines. It represents a continuation pattern used by traders to predict the future movement of prices. During the duration of the flag, high and low prices create such patterns.
Imagine a continuation pattern as a signature of the marketplace which appears in recognisable shapes and bull and bear flags.
To learn more about the meaning of bulls and bears in financial markets, we suggest reading this article: 'What do the terms Bull & Bear Market mean?'.
The slope of these two trend lines can be up or down, but they should be parallel to each other. The asset’s price typically moves sideways until it breaks out in one direction which depends on the type of the flag pattern.
In other words, a flag pattern, either a bull or bear flag pattern, creates a small ascending or descending trend that gives the chart pattern a flag-like appearance.
What is a bull flag pattern?
A bull flag refers to a technical chart pattern used by traders to signal when the market is likely to rally further. Bull flag patterns typically appear when prices go through a short-term corrective phase followed by a broader uptrend which indicates that the asset’s price is likely to rise in price.
This pattern mirrors a parallelogram-shaped flag that is horizontal or sloping downward, followed by a broader increase in the upward direction or the breakout. For example, during volatile market conditions, crypto traders tend to utilise certain trading strategies such as swing trading and a bull flag pattern for trading after a breakout or during a strong trend.
The bull flag pattern tends to unfold phases, starting usually with a broad upward trend caused by an influx of buying pressure due to market dynamics that favour an increase in the asset’s value.
The main objective of a bull flag pattern is to enable traders to gain profits from the current momentum in the market. Both bullish and bearish flag patterns are considered to be short-term, lasting from one to approximately six weeks.
What does a bull flag pattern look like?
A bull flag pattern consists of two parts. The first element represents the flagpole which occurs before the flag portion of the chart pattern. It can be recognised by a price surge that meets some resistance at the end of the move.
If you imagine a chart, this would appear as either one or a few long green candles, demonstrating a preferably high volume to signal an increase in buying pressure.
The second element of the flag is formed as part of a downward or horizontal range that appears as price consolidates below the highest part of the flag. This shape tells us the type of chart pattern that occurs after the flagpole.
For example, for a bull flag to form, the range must be contained within two parallel lines on the chart.
Finally, a bull flag pattern ends with the break of the flag’s range. Traders recognise an upwards breakout from such a range to be a signal of bullish continuation.
How to spot a bull flag pattern?
As mentioned above in the text, the occurrence of a bull pattern signals that the price of a specific asset could increase. Understanding how to spot a bull pattern is important because even small mistakes can result in big financial losses.
It usually starts with the line chart forming a solid pole that demonstrates the asset’s sudden increase. When the volume decreases, the chart shows a flag-like pattern on the top of the pole. After this happens, there is a large volume of the asset in question.
Traders can also calculate the bull flag profit target by using the price difference between the flagpole’s base and its highest point.
One of the most important hints when trying to identify a bull flag pattern can be spotted after the formation of the pole as a small correction before the next uptrend. Additionally, the volume of the asset fluctuates during the correction phase.
All of this probably sounds pretty complicated. If you are a newcomer to the world of crypto trading, we suggest enrolling in one of our Learn Crypto Academy’s courses to ace the basics of crypto trading.
Examples of bull flag patterns
There have been several examples of bull flag patterns in the crypto market. For example, a flag pattern formed on the Bitcoin chart back in the beginning of 2021.
The price of Bitcoin reached an all-time high in January 2021, and then it consolidated in a narrow range for a few weeks, forming a rectangular shape on the chart. When the consolidation period ended, the price broke out of the flag pattern and reached new all-time highs.
The same happened with Ethereum in the middle of 2022. Ethereum experienced a sharp increase in its price and consolidated in a rectangular shape for several weeks before breaking out and continuing to rise.
Are the bullish pennant and the bull flag pattern the same thing?
The so-called bullish pennant represents a variation of the bull flag pattern in which the flag resembles a sideways triangle rather than a downward channel or a horizontal box.
The bullish pennant signifies that, after the initial upward, the asset’s price narrows during consolidation until it reaches the tip of the pennant’s flag. Bullish pennants are continuation patterns, and the price is expected to break upward once the pennant appears.
The difference between a bull flag pattern and a bear flag pattern
The bull and bear flag patterns are divergent chart patterns used within technical analysis. They differ in many aspects such as market and breakout direction, price action and implemented trading strategies.
As mentioned already, the bull flag patterns present a bullish continuation pattern; in other words, bullish flag patterns signal a resumption of the upward trend while a bearish flag pattern signals a reopening of the downward trend.
When it comes to the breakout direction, the breakout in a bull flag pattern appears to be on the upside- simply put, buyers push the price higher. On the other hand, with the bear flag pattern, the breakout occurs to the downside as sellers push the price lower.
As for the price action, a bullish flag pattern is formed when the asset’s price consolidates following a sharp price increase and forms a flag-like pattern. The price action of bullish flags is associated with range-bound movements and lower trading volumes.
Unlike bull flags, bear flag patterns are formed when the asset’s price consolidates following a sharp decrease and forms a flag-like pattern as well.
Whether it is a bull or bear flag pattern, traders utilise divergent trading strategies. For example, they use the bull flag pattern to enter long positions after the breakout and place stop-loss orders below the lower boundary of the flag. On the other hand, traders can use the bear flag pattern to enter short positions following the breakout with a stop-loss order placed above the flag’s upper boundary.
To better understand positions in crypto trading, check out this article: 'What are long and short positions in crypto trading?'.
How to trade bull flag patterns?
Crypto traders frequently use bull flag patterns to provide informed exit and entry positions. A bull flag pattern shows the trader several divergent pieces of information before they can decide on whether to execute the trade.
For example, a bull flag can vary in certain aspects such as the flagpole length, the length of the consolidation during the flag phase or the distance between the parallel lines.
Considering that a bull flag can signal an upward trend, it is commonly used by momentum traders; they step into a position during the lows of a flag phase or when they spot the start of a new price breakout. Their main goal is to profit from buying a certain asset during the consolidation phase to take advantage of another price increase.
Since there is a possibility that this chart pattern doesn’t play out, especially in the volatile crypto market, or that traders misinterpret price data, crypto traders tend to utilise certain risk management strategies along the way. For example, they tend to examine the prices an asset bounces off during the flag phase, and always consider how much they are willing to risk on a trade.
It is always a good idea to use other technical analysis tools such as moving averages, trend lines and oscillators to make informed trading decisions. When a trader spots a bull flag pattern, it is recommended to view this data in the context of other technical indicators as well.
This is especially important for the crypto market, where momentum hinges on external forces and makes it harder to capitalise on prevailing market trends.
A typical example of a bull flag pattern looks something like this- traders spot a flagpole by one or two green candles, accompanied by a bigger increase in volume which signifies a buy pressure entering the market.
The volume typically lessens with the asset’s price entering the consolidation phase and the price trading within a horizontal box or downwards parallelogram.
The price should leave the box in the direction predicted by the trader and provide the trader with a trigger to enter the trade and gain profits on the momentum’s continuation.
Are bullish flag patterns reliable?
Bull flag patterns are a popular tool used within the sphere of technical analysis to spot potential points of continuation in a bullish momentum in the market.
Both the bull and bear trading flag patterns are considered to be reliable chart patterns with a decent success rate. However, a deep understanding of these patterns is a must because making mistakes can lead to financial losses. As with any trading strategy, there is no guarantee that it will play out as expected.
New traders, that just learned what a bull flag is, might be too enthusiastic to spot certain instances of the bull chart pattern and make mistakes along the way. For example, one of the most common mistakes is linked to misinterpreting patterns where a sufficient level of the upwards momentum is not truly present.
Main advantages of the bull flag pattern
The bull flag pattern is a frequently used technical analysis tool within the world of crypto trading and traditional finance as well. Let's briefly explain the main benefits of bull flag patterns.
Easy to identify and use
This chart pattern provides a clear visual representation on a price chart which makes it easy for traders to detect.
Bull flag patterns can be used on divergent time frames such as intraday charts to daily or weekly charts which makes it applicable to a wide array of trading strategies.
Clear entry and exit points
The bull flag pattern provides precise entry and exit signals which makes it easier for traders to place their trades and further manage their positions.
For example, traders can enter a long position once the price breaks above the upper boundary of the flag and use the lower boundary as a stop-loss level.
Getting in early
The bull flag pattern enables traders to spot the potential continuation of an uptrend. Spotting early a continuing bullish trend can provide several significant opportunities.
Main risks of the bull flag pattern
While bull flag patterns can lead to a substantial success rate and reliability, they bring to the table several risks traders must be aware of. Let's check them out.
False signals
One of the main risks associated with the bull flag chart pattern is the appearance of false signals or false breakouts. This can happen when the price breaks out of the flag, but quickly reverses and moves back within the flag, trapping traders who entered long positions.
Market volatility
We have already mentioned that the volatility of the cryptocurrency market must be taken into consideration. The crypto space is associated with prices experiencing sometimes unexpected and quick movements driven by external factors such as macroeconomic events, regulatory novelties and market sentiment.
Since the bull flag pattern represents a technical analysis tool, it doesn’t consider all of these factors that influence market volatility. This can make it more difficult to accurately spot the continuation phase or detect a reversal. Traders should always implement an efficient risk management strategy as failures can result in significant financial losses.
Whipsawing
A whipsaw refers to an event when the price goes up and falls down sharply several times within a narrow range. It can have an outcome in crypto traders entering positions based on the initial breakout of the pattern, only to experience how the trade turns against them.
Bottom line
The bull flag pattern presents a valuable tool for both traditional and crypto traders looking to capitalise on current market trends. If traders understand the main characteristics of this pattern and can identify it on price charts, they can efficiently plan out their entry and exit points and manage associated risks.
When trading with bull flags, it is significant to lay down a clear entry point and set stop-loss orders to manage risks. Additionally, it is wise to use other technical indicators and tools to check the accuracy of the data and protect themselves against potential losses.
Even though bull flag patterns are commonly used, they might not always be easy to detect and understand. Education is the key to a more effective trading experience. With research, continuous learning and patience, crypto traders can unlock new opportunities on the market.