Trading the bull flag chart pattern is just one of the many popular chart patterns that traders can use that can potentially bring fast profits.
This pattern can generate fast profits due to the short-term nature of the consolidation area that essentially is considered the “flag” part of this chart pattern. This is created after an initial quick rise up in price (the flag pole) before prices are ready to possibly shoot up yet again from breaking out of the flag area.
Chart patterns (like the bull flag pattern) are a part of the theory of technical analysis.
Two Pieces To Trading A “Bull-Flag” Chart Pattern
The Flag Pole (vertical price phase) – This is formed rather quickly due to the strong move to drive the stock price higher over a very short period of time. By looking at a chart, you would see prices quickly shooting up in a vertical fashion over several days forming the flag pole. Once prices start a cooling off period near the top of the flag pole, the flag area then starts to form itself.
The Flag (consolidation price phase) – Once the cooling off period starts, prices will typically consolidate in a sideways trading fashion which then creates the flag. The flag (consolidation area) will usually be attached to the upper to middle part of the flag pole. After the consolidation phase is over, prices can potentially breakout to the upside and quickly rise again under the theory of this chart pattern.
Theory Behind A “Bull Flag” Chart Pattern
The flag pole is formed when traders and investors are in a hurry to quickly bid up the price of the stock which may be as a result of some unexpected positive news or events. This creates a lot of excitement and demand which drives the price of the stock up fast to quickly form the flag pole.
As prices start a cooling off period, prices begin trading in a sideways fashion that creates the consolidation area. This area then becomes the flag itself. Early sellers are taking profits while committed buyers are still accumulating the stock which produces a stable price consolidation range. As a result, the flag area starts to emerge and holds itself usually to the upper to middle part of the flag pole.
The development of the flag can last anywhere from a week to 1 month. Anything longer than that would cast doubt as to it being a legitimate “Bull Flag” under chart pattern theory. This amount of time gives eager buyers enough time to mull over the positive news or events still fresh in their minds. Then a strong new resurgence of buying begins again and buyers quickly bid up the stock to an even higher price.
The “Bull Flag” Trade Entry Point
Draw a trend line across the upper consolidation area of the flag. Your entry price would be where the price breaks through the upper trend line of the consolidation area (or just a nickel or two above it).
What Is The Profit Potential For A “Bull Flag” Pattern
The profit potential for a “Bull Flag” pattern is measured by taking the full length of the flag pole (the difference in price between top and bottom part of it) and then adding that amount to the price at which it breaks through the upper trend line of the consolidation area of the flag.
Caution Note: When trading any type of chart pattern including the “Bull Flag” pattern (or any kind of other price action methods for that matter) there is always the chance that the expected price action will not behave in accordance to the theory of the chart pattern undertaken. Therefore, risk management is crucial in order to manage the possibility of incurring any trading losses that may result beyond a reasonable amount as set by your risk management rules.
