Multi-candle chart patterns work roughly the same way as one-, two- and three-candle formations covered in previous articles. However, these formations don’t have a defined number of candles and serve as an indication of either continuation of the preceding trend or its reversal.

Bullish and bearish flags are continuation candlestick patterns that suggest that the current trend will resume after a short consolidation period.

Bullish flag chart pattern structure

As the name suggests, a bullish flag looks like a flag on a pole.

This pattern consists of a distinct pole comprising several candlesticks, a body in the opposite direction of the main trend and a breakout. To be considered a bullish flag, this formation needs to have the following characteristics:

The “flagpole” is strongly bullish, with higher highs and higher lows;
The “flag” is made up of candles with lower highs and lower lows that take place between two strictly parallel trend lines;
A breakout pierces the top line, resistance.

Bearish flag chart pattern structure

A bearish flag has exactly the same structure but upside down – a descending pole, an upward-facing flag and a breakout at the bottom.

Similar to a bullish flag, a bearish version needs to follow certain characteristics to be considered a valid chart pattern:

A strongly bearish pole with lower highs and lower lows;
A bullish series of candlesticks with higher highs and higher lows between two parallel trend lines;
A breakout through support – the lower line, in the flag.

How do flag chart patterns work?

Both bullish and bearish flags indicate that the prevailing power is strong to form a trend. At some point, the opposing power gains enough control to try and push the price in the opposite direction from the main trend. However, it is not strong enough to reverse the trend, so the price starts trading mostly sideways. This allows the dominant power to consolidate their efforts and push the price into a breakout, continuing the main trend.

How to trade with Flag chart patterns

Like with any other candlestick pattern, a rule of thumb is to wait for it to be completed and only then enter the market.

Trading with a bullish flag pattern

As a bullish flag is a bullish continuation pattern appearing in an uptrend, it suggests opening a long trade once the breakout occurs.

The most common way of placing a position when trading with this pattern is to use the closing price of the breakout candle as an entry level. Stop loss can be placed at any point in the body, as any movement within it would invalidate the pattern and indicate that it’s better to exit the market. To determine a suitable take-profit level, traders commonly calculate the price change from the flagpole's base to its peak and then add this measurement to the breakout point.

Keep in mind that this scenario may be a better fit for risk-prone traders who choose to not wait for additional candles to close after the breakout, confirming the trend. If you decide to wait a little longer, the entry, stop-loss and take-profit levels may be different and need to be identified individually.

On the image below, you can see that there was a small pushback from bears, and the second candle after the breakout is bullish. However, the price shot higher right after it, validating the pattern’s suggestion.

Trading with a bearish flag pattern

The appearance of a bearish flag in a downtrend suggests going short once the pattern is confirmed. Following the same logic, the closing price of a breakout candle can serve as an entry level.

However, as you can see on the image below, a continuation of a trend indicated by a bearish flag can be short-lived. Shortly after the breakout, the price started moving sideways, eventually reversing into an uptrend.

To decrease the risk of false signals when trading with chart patterns, it is essential to gather additional insights from the price chart.

In the example above, you can see that only three bearish candles formed once the breakout happened. The fourth candle was strongly bullish, forming a bullish Engulfing pattern and indicating a potential upcoming price reversal.

Additionally, many traders use technical indicators to compare and confirm their findings, as chart patterns alone only indicate a potential outcome but do not guarantee them.

Another safety measure traders should always take is trading with a risk-free demo account first to hone their skills before trading with real money. Create one now and practise trading with bullish and bearish Flag chart patterns. To learn more about chart patterns, check out our next article, where we explain how Pennant patterns work.

Trade major, minor and exotic pairs with excellent trading conditions.

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