As humans, one of are primal instincts are to explore, recognize, and identify patterns. We do this in all walks of life and trading is absolutely no different.
There are countless trading patterns out there that you can find in any basic Technical Analysis book, but today we will go through one very prominent and well-known pattern, the Bull Flag.
As the name implies “Bull”, referring to this pattern as a bullish setup, meaning one believes this pattern should lead to a move higher.
The Bull Flag
The Bull Flag is well-known and prominent pattern for day traders, swing traders, and investors alike.
The first cornerstone of this setup is to have price move up strongly, preferably with an increased amount of volume, signalling increased and more aggressive buying pressure. This is what forms the pole portion of the Bull Flag.
Next, you want to see the price consolidate in some form of a wedge pattern. This can be portrayed in a few ways as you will see below (the green arrow indicates the buy point on the flag-line break, and the stop/risk level is represented by the bottom white line):
Shape of the Pattern
Essentially, you want to see price being squeezed in a tighter range in one of these types of wedge formations and then wait for the break upwards of the flag.
The break of the flag should preferably be accompanied by an increase of volume to aide in confirmation of continued momentum. At its core, this is the Bull Flag.
A lot of trading success comes from finding styles and patterns of trading that gels well with you are as an individual and trader.
Along with this comes different trade management perspectives. Once you understand this pattern from a visual perspective, execution in real time becomes the most important task.
How will you enter this trade? Some will buy the point of the flag break, some ahead of the flag break, some well after its broken out and on pull-backs and replacements.
I personally prefer to buy the flag line break and risk off the base support level.
At what prices will you take profits? Will you scale out? Will you hold it all for some target you’ve deemed reasonable and valid? Are you going to use a trailing method?
Define your exit system ahead of time so you don’t have to think on the fly how you’re going to manage trades. We use a trailing method at LiveStream Trading which takes out the guesswork and emotion of the trade by having defined stop loss and profit targets ahead of time, and finally trailing the last portion of our shares as long as the time frame we are trading is still in trend.
There really isn’t a correct answer or one size fits all when it comes to your exit approach. Some may exit once the trade reaches 3R+ (three times risk), or until a trend break. It comes down to what works best for you and what you’ve proven works in your own data and results.
The best way to track your data is by using a free trading journal and collect data on every trade you take. Check out this blog post on aggregating your data and turning it into a trading system.
There are no trade setups that work 100% of the time, so its important to properly manage risk and know where to exit if the trade doesn't work in your favor.
At what point will you accept your thesis is wrong? Depending on your entry type, you may vary where you place your stops.
For some traders their stops will be at the low of the past few candles, or at the low of the flag as a whole, some will even use arbitrary number stops to give wiggle room to their trades, but I personally disagree with that method.
I'm a firm believer in having one entry point with a defined risk level (stop loss) determined ahead of time and 4 targets that I use to exit the trade on for profit.
If a setup meets all the 4 points of criteria that I use to validate a trade that's going to offer me an 80%+ win rate, I will take one entry (on the trigger of the flag break), and have a set stop on the base/support level.
Defining Your Trading System
No basic trading pattern or setup is not going to turn your trading from rags to riches. Knowing the visuals to the pattern is a start, but its not going to be enough to find consistent profitability.
I promise that there is no simple pattern that is going to make you a successful trader unless you have done the due diligence to back-test and add specific criteria to the pattern that must be met.
For example, our trading system requires at least 4 points of criteria to be met before we can validate a trade. The pattern itself is just one piece of criteria, and then there are 3 other things that need to be met that will make a setup go from a 50% win rate to an 80% win rate.
I found this out though vigorous back-testing and years of experience, however, you can learn our trading system and skip all of those hard steps and learn what works right away.
To be consistently profitable trader you must have hard rules and criteria to follow which will validate every setup you trade.
To give you some insight on what these types of criteria could possibly entail is indicators, time of day and volume requirements to name a few.
At Livestream Trading we provide all of our students with an edge to trading the markets that I’ve vetted with for over 13 years of trading experience.
Everything from defined chart patterns and setups to all the gritty details that make them work with a high win rate.
Hope you found this post helpful, stay tuned for our next blog post on short selling setups!
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