Trading the Bull Flag Pattern
The bull flag trading is quite a straightforward process as long as the previous phase - spotting and drawing the formation - is done properly. As outlined earlier, the bull flag gives a shape and formation to the uptrend and it helps traders to determine entry and limit levels, which is exactly what we are going to do now.
We use the same GBP/USD daily chart to share simple tips on trading bullish flags. The breakout occurs once the buyers reassume control of the price action after a temporary pause in the uptrend.
Our entry is located either at the close of the breakout hourly candle, or we wait for a retest, which can be tricky as the price action may never return to retest the broken resistance. In this example, we enter the market as soon as the breakout candles close above the flag’s resistance.
Any move to the inside body of the flag invalidates the pattern. As a general trading rule, you should leave some space below the flag’s resistance when placing a stop-loss order, to protect yourself against market whipping around in highly-volatile markets.
The take profit is measured by simply copy-pasting the flagpole from a point where the breakout took place. Some traders prefer to use the starting point to copy-paste the trend line where the breakout move initially started i.e. within the body of the flag. While both are generally acceptable, we advise you to use the breakout point to copy-paste the flagpole.
The ending point of the pasted trend line signals a level where we should consider taking our profits off the table. You can see that the market touched exactly this level, and then slightly corrected lower, which most likely points to take-profit orders of the bull flag being hit.
Overall, we risked around 140 pips (a distance between our entry and stop loss) to make 430 pips, which translates into a very attractive 1:3 risk-reward (R:R) ratio.
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