HOW TO TRADE BULLISH FLAG CHART PATTERN

How to trade bullish flag chart pattern
Infographic - How to trade bullish flag chart pattern

Entry: after breaking the flag's upper border at point (4)

Take profit: identified by measuring the flag's pole height, which is the vertical distance between points (1) and (2), that measurement is then applied from the breakout rate (4)

Stop loss: the flag's lowest low (3)

BULLISH FLAG PRICE ACTION

This chart pattern starts forming with bulls already in control of the exchange rate's sharp uptrend. When bears enter the market, trading is contained briefly in a down-sloped range. Bulls then break that range's upper resistance, and the exchange rate continues its uptrend.

Let's break down the pattern formation!

A sharp upwards price action is initiated from (1) till it finds the first resistance (2), creating the flag's pole.

Price action reverses direction from the first resistance (2) and starts forming lower highs and lower lows in a narrow flag-like formation, till it finds the lowest support in that formation at point (3)

The pattern is completed when price action reverses direction from the lowest support (3) and goes upwards till it breaks the flag's upper border at point (4)

NOTES ON BULLISH FLAG

Direction

Continuation

Type

Bullish

Occurrence

High

Common term

Short-Medium

Before the breakout, at least two highs (including the flag's pole high) and two lows are the minimum for a valid pattern, more touches are acceptable.

The flag's pole is a sharp upwards price action.

Volume is usually high at the flag's pole, as well as when breaking the flag's upper border.

This pattern is commonly found on short-term and medium-term time frames.

BULLISH FLAG REWARD:RISK

This pattern is known for its high R:R.

R:R depends on how narrow the flag formation (2-3) is, compared to the flag's pole height (1-2)

Always remember that the stop loss level explained above is absolute, the actual stop loss rate for your trade setup should be a bit beyond those levels to give the trade setup some room to breathe, and of course, calculations for position size and R:R should be done with respect to that rate.

BULLISH FLAG REAL TRADE

Bullish flag real trading example
Forex chart - Bullish flag real trading example, as found on the H1 chart of EUR/USD using XM's MT4 platform

PRE-BREAKOUT CALCULATIONS

Since a bullish flag chart pattern can be spotted after the reversal from point (3), you can save yourself precious time by doing the following set of calculations before the breakout, since they don't rely on the trade's entry rate.

  • Pattern length (point (2) rate - point (1) rate)
    • (1.20538 - 1.19516) * 10000 = 102.2 pips
  • Take profit rate (point (3) rate + pattern length)
    • 1.20190 + (102.2 / 10000) = 1.21212
  • Stop loss rate (point (3) rate - 15% of pattern length)
    • 1.20190 - ((15 * 102.2 / 100) / 10000) = 1.20037

TRADE SETUP

Choosing when to enter the trade after the flag's upper border breakout is always left to your best judgement. In this trade, we chose to enter the market at the closing rate of the candle that broke the flag's upper border, which was a strong bullish candle that closed on a higher rate than that of the flag's pole high (2), suggesting a real breakout for the flag's upper border.

  • Trade entry rate
    • At the closing rate of the candle that broke the flag's upper border at point (4): 1.20556
  • Take profit in pips (take profit rate - entry rate)
    • (1.21212 - 1.20556) * 10000 = 65.6 pips
  • Stop loss in pips (entry rate - stop loss rate)
    • (1.20556 - 1.20037) * 10000 = 51.9 pips
  • Stop loss R:R (take profit in pips / stop loss in pips)
    • 65.6 / 51.9 = 1.264

Currency pair

EUR/USD

Timeframe

H1

Breakout

08-Feb-2021

Platform

MT4

Broker

XM