How to Trade a Bearish Flag Pattern

Technical analysis allows for the study of a variety of different trading patterns to assist traders timing their entries and exits. One of the most useful patterns in a trending market environment is used to spot continuations in price. Today we will look at identifying and trading the bear flag pattern in an established down trend.

Identifying the Pattern

Identifying a bear flag can be easy once you know what you’re looking for. The pattern itself is divided into three parts. First we need to find the flag pole which will be identified as our initial decline. This decline can be steep or slowly sloping and will establish the basis for our trend. Next we have the flag itself. This is identified as a period of consolidation after the completion of prices initial decline. During this period, prices may slowly channel upward and retrace a portion of the initial move. At this point traders will wait for price to break to lower lows in the direction of the trend.

After price begins to move lower again, we can then find the final component needed for trading a bearish flag pattern. The profit target is a potential value to take profit after a currency pair’s next decline in price. This pricing level can be identified by first measuring the distance in pips of our initial decline. This value can then be subtracted from the peak resistance line formed from our consolidating flag. Now that we know what we are looking for, let’s look at an example.