Easy to spot with a trained eye but complex to a novice
Spotting the right trend to an advantage is what defines making it big in trading. But whether these trends are bullish or bearish, it is a challenge to ride on rightly on the developing patterns. Sometimes corrections will occur to allow more investors to participate. If that is so, participating buyers will extend the bull run. If selling traders dominate, expect a bear run to stay. Continuing patterns are a trader’s guide in spotting trend extensions in bull or bear runs. They are known in the trading circle as bull or bear flags.
The Bear Flag
When a downward trend is extended by a short upward consolidation and a continuing downward trend, it is technically called a bear flag. The short upward consolidation usually consists of short up and down patterns called “flag.” This is followed by a strong downward move known as “flagpole.”
In spotting the formation of a bear flag, first, there must be the initial decline which is the long steep or sloping downward pattern to identify the flagpole. It means a possible bear flag is about to happen.
Second, a consolidation happens when the pattern stops and moves upward by retracing a part of the initial move which must be within 38%. If it reaches 50%, it may not be a bear flag. Afterward, the pattern goes down again to lower lows in the direction of the downtrend.
And thirdly, the next decline becomes the profit target. The trading entrance can be at the top of the flag or on the breakout below the low of the lower channel. Ideal prices can be located at the patterns breaking lower with lengths equaling the size of the flagpole.
All these components make a bear flag a highly reliable price pattern and can be applied in all types of financial markets including the cryptocurrency market. It may be easy to identify among professional traders but may be complicated for the novices.
To know when to trade using the bear flag, the flag can be seen trading upwards in a channel then moves downward with consolidating lower highs and lower lows. One assisting indicator that traders use is the Fibonacci retracement indicator that identifies entry levels where the flag can turn and go on the current trend.
Sometimes traders are deceived by a bear flag pattern thought of as a bullish breakout. The difference is that bear flag patterns gradually rise in price while on a downward trend. Bullish breakouts, meanwhile, manifest a series of sharp moves toward the uptrend. A Donchian channel is a tool that can assist traders when to spot such potential breakouts.