Everything About the Bull Flag Candlestick Pattern

The bull flag pattern is a continuation chart pattern that facilitates an extension of the uptrend. The price action consolidates within the two parallel trend lines in the opposite direction of the uptrend, before breaking out and continuing the uptrend. As the name itself suggests, a bull flag is a bullish pattern, unlike the bear flag that takes place in the middle of a downtrend. 

In this blog post we look at what a bull flag pattern is, its key elements, and main strengths and weaknesses. Moreover, we share tips on how to trade a bull flag and make profits.

What the Bear Flag Tells Us 

A bullish flag consists of the flagpole and a flag. As such, it resembles a flag on a pole. It's constituted after the price action trades in a continuous uptrend, making the higher highs and higher lows. A bull flag resembles the letter F, just like the double top pattern looks like an “M” letter and a double bottom pattern - a W letter.

Following the creation of a short-term peak, the price action starts a correction to the downside. Unlike the bullish pennant, which consolidates the price action within a wedge or a triangle, the bullish flag pattern uses two parallel trend lines - a channel - for the buyers to regroup before initiating a new leg higher. 

 

As a general rule, the consolidation phase shouldn’t surpass the 50% Fibonacci retracement of the prior leg higher (the flagpole). A pullback that extends below 50% signals that the uptrend is not as strong as it should be. Hence, a strong bull flag usually needs retracement between 38.2% to 50% before breaking the upper trend line. 

These three elements are integral for the bullish flag to occur:

• The flagpole - the asset’s price must trade higher in a series of the higher highs and higher lows;
• Flag - a consolidation must take place between two parallel trend lines;
• A breakout - the consolidation can’t take forever. A breakout to the upside activates the pattern, while a break of the supporting line invalidates the formation.

Strengths and Weaknesses

The bullish flag is a continuation pattern. It helps trades identify the stage which the trend is currently in. As a general trading rule, it is never advised to buy at a random price hoping for an extension to the upside, but wait for either a break of an important resistance or a pullback. Hence, the bull flag facilitates a trade after the flag is broken to the upside. The breakout equips us with precisely defined levels to play with. 

Overall, the pattern is considered to be a formidable pattern to trade, as long as all elements are in place. This is especially the case when the retracement ends at around 38.2%, creating a textbook bullish flag pattern. Finally, it offers a great risk-reward ratio as levels are clearly defined. 

On the other hand, the prolonged consolidation phase, which takes the correction below 50%, can result in a reversal pattern. Again, the strongest bullish flags have corrections ending around 38.2% Fibonacci retracement level.

Spotting the Bull Flag Pattern

As mentioned earlier, the bull flag is a continuation pattern. Therefore, we are looking to identify an uptrend - the series of the higher highs and higher lows. The second step in spotting the bull flag pattern is monitoring the shape of the correction.

In the chart below, we see GBP/USD price movements on a daily basis. The flagpole (the blue ascending trend line) covers the beginning of an uptrend. After a short-term peak is created, the price action corrects lower to around 50% of the initial move.

 

In this case, the consolidation takes a bit more time than usual, but it is not an aggressive correction lower. The price action actually moves more in a sideways fashion, but still with an overall bias lower, as the buyers consolidate their power. Finally, there is a break to the upside, which takes the price action aggressively higher. 

If you look at our example more closely, you can even spot a mini bull flag, where the breakout of our flag is actually a flagpole in the mini pattern, while the correction above the upper trend line resembles a flag (see chart below). Overall, both are bullish patterns that facilitate an extension of the uptrend. 

 

 

In both cases, a breakout occurs in a strong manner. After a series of the smaller candles, the buyers reassume control of the price action and break the upper trend line to the upside, which activates the bull flag pattern.

Trading the Bull Flag Pattern

The bull flag pattern 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.