A Bear Flag is a bearish or downtrend continuation pattern in which the price consolidates in the opposite direction of the existing trend.
The price retraces (goes back in the opposite direction) because the sell-off exhausts for the near term.
In a Bear Flag, the flag part is formed by highs and lows that gradually increase in an ascending channel-like pattern. Upon connecting the highs and lows using trendlines the pattern looks like an inverted flag with its pole.
See the anatomy of a Bear Flag and how it typically looks on a chart.
Drawing trendlines to spot a Bear Flag is the first thing and then setting up the trade is the next.
Let’s delve into the process of trading a Bear Flag.
The Process of Trading a Bear Flag
The method of trading a Bear Flag is fairly simple.
Just open a short trade right after the price breaks out of the support trendline (downtrend continuation).
On the other hand, open a long trade if it is breaking out of the resistance trendline of the flag.
Multiple Time Frame Analysis: From Higher to Lower Time Frame
Multiple time frame analysis is quite significant before you initiate a new trade.
This thing helps you to double confirm your trade.
Let me explain.
First, you spotted a Bear Flag on a higher time frame.
In the following image, I found a Bear Flag on the Bitcoin chart’s 4-Hour time frame.
Then I switched my time frame to 5-Minute to see the minuscule price action inside the Bear Flag.
Before the price breaks out to the downside the price action was consolidating inside a rectangular-like pattern (colored in green).
Right after the price broke out through the support trendline it immediately got support and started to trade in a compact range (colored in grey).
After being traded for a few hours in that grey rectangular box, the price broke the local support zone (the grey rectangular box).
You might think…
What is the logic behind these compact price action ranges in 5 Minutes time frame?
Let me explain.
The compact or tight ranges signify the act of defending support and resistance levels.
When the breakout appears it shows the direction of the next move.
Hence, to open a new trade wait for the closing of the candle outside of the support trendline.
In the case of the BTC chart above, I opened a short position right after the closing of the 5 Minutes candle.
The price didn’t continue going downwards but stuck there, was being traded in a tight range again for a few hours, and eventually, the price broke that range.
However, this BTC trade wasn’t easy to trade.
The market did a brutal retest right after it broke out from the grey rectangular box before it started to keep going downwards.
Which is quite normal in volatile assets like Bitcoin.
And in such cases determining your Stop-Loss (SL) based on the asset’s volatility (or the typicality of the price action) becomes very important.
So how would you choose SL to keep it at a proper distance to avoid unnecessary liquidation?
Let me explain.
How to Set Stop-Loss in a Bear Flag
First off, find the last swing high on the higher time frame and set your SL just above that price level.
In the following Bitcoin chart, the last swing high is marked with the green line which is about 21,907.
Another way of setting SL is to use the Fib Retracement tool.
Select the Fib tool, and click on the last highest swing point that has taken place before the start of the current downtrend. Now drag the tool and click on the swing low of the bear flag.
For the most part, you can place your Stop-Loss above the 0.236 (23.6%) Fibonacci level along with the confluence of the Last Swing High (as shown in the above image of the Bear Flag).
If you want a manual approach to cut your losses you can close your trade if a candle closes above the 23.6% level.
How to Measure the Price Target of a Bear Flag
The next step is measuring the price target.
This will help you to determine your profit-taking level.
I’ll explain…
Select the Trendline tool, click on the last swing high, and drag it down to the swing low of the Bear Flag. This line is technically called “Flag Pole”.
SIDE NOTE: The flag pole should be drawn from the level that the price is continuously going downwards without any temporary pause of the downtrend.
Now place it above the breakout red candle.
Bam! You got to know the technical target of the Bear Flag. The target price is around 19,200 in the above image.
The price has also started to move up around that price range (about 18.50%). This is because many traders expect a price bounce from a support area. And as a result, this creates more buying activity and causes the price to move up.
The question is:
Does the price always reach the technical price target?
No…
There’s guarantee that the price will reach there before a nice bounce to the upside.
Hence, it is advisable that you take profit partially along the way.
Now It’s Your Turn
The next time when you’ll trade a Bear Flag make sure you are following each step before placing a trade.
The SL will take care of your money in case the trade goes wrong.
The technical target will give you an idea of when to close the trade to book or lock in profits.
If your Stop-Loss has triggered then patiently wait for the next opportuniy to arise before taking a new position.
Common FAQs
A Bear Flag generally indicates an imminent downside movement of the price action.
A Bear Flag is not bullish at most of the times. You could see bullish Bear Flags only in rare occasions.
From a probabilistic point of view, Bear Flags are fairly reliable especially if the flag is being pierced with good volume.
If there is lack of enthusiasm in the downside, (i.e. less selling pressure) bulls could come in control and the breakout will probably be failed.