Bullish flag patterns occur in stocks with strong uptrends, they are considered as continuation patterns. The pattern is quite easy to recognize because it looks like a pole with a flag. This practical trading guide explains how to take advantage of the pattern, both as a swing and daytrader.
If you are not yet completely familiar with the flag pattern or you want to refresh your knowledge, you can use this link to read an article where the pattern is described in detail.
ChartMill offers the ability to automatically scan for the presence of bull and bear flags. To do so, go to the 'Stock Screener' page and select the 'Indicators' section from the menu. You can filter on both the daily and weekly chart by the bullish or bearish flag pattern. ChartMill even allows you to filter by the length of the pole and both the length and width of the flag itself.
Keep in mind that these are automatically generated results and certainly not all of them are perfect. The screener provides an initial basic selection of stocks that exhibit characteristics of a bullish or bearish flag, but further manual selection by yourself is required to withhold only the best setups. Don't forget to make the flag pattern visible on the charts as well. To do so, in the stockscreener, select the 'Main Chart', click on the 'blue plus sign' and via 'Select Overlay To Ad' choose 'ChartMill Flag' from the drop down menu.
Volume and momentum are the most important characteristics when trading flag patterns (with all technical patterns, by the way). The pattern itself is only an indication, it gives us a potential low risk setup. Momentum says something about the speed and force with which the price moves but says nothing about the direction the price is going. Volume has everything to do with the amount of shares that change hands. This can be measured over a single day or over a longer time period.
When rising momentum and volume occur together, this is important information for the technical trader. After all, you are dealing with a price movement which is gaining strength (momentum) and at the same time more and more shares are changing hands (volume). This degree of volatility, combined with technical patterns and sound risk management, offers attractive opportunities to investors.
Not all flag patterns are suitable for trading. Flag patterns come in all shapes and sizes but at least the following basic characteristics must be present:
A strong rising trend with clear consecutive large candles, rising volume and a closing price for each candle close to its highest price. This tells us that there is considerable momentum.
After this first price climax, price drops slightly. At this stage there should be absolutely no question of an explicit sharp decline, as we want to avoid that kind of downward momentum. It's rather a sideways movement, in the most ideal circumstances the candles are quite small and there are several tails visible at the bottom and at the top of the candles. This is the ongoing price action that forms the actual flag of the pattern. This pause after the initial strong rise is triggered by those who bought the stock early and are now taking advantage of the strong buy momentum to (partially) sell long positions.
The moment the actual breakout occurs is when new buyers step into the market.
Check out the bullish Flag Pattern in the chart of Entravision Communications Corp. on date of June 30, 2021.
The same principles remain valid. See this example of a bearish flag pattern at the end of August 2021 (Stanley Black&Decker Inc.).
With these filters, ChartMill showed me 112 candidates. To further refine these I then added another price filter :
I ended up with only 5 results. As you can see in the screenshot above I have set the historical date to 2021-09-10, that way you can now access my exact filter results that ChartMill presented at the time using this link. Initially I thought that the filter was set too strict with this last condition but from this small group of stocks I noticed almost immediately one ticker:
So… waiting again for a confirmation breakout (Did I already mention that patience is an essential skill as a trader?)
The following day, ITCI rises more than 2,5% and the closing price was just above resistance. We now have two confirmed price patterns, a Bullish Flag pattern in a Cup and Handle chart Pattern.
Knowing when to buy is one thing. Knowing how much you are allowed to buy and what your maximum loss will be if you get stopped out are additional essential elements for any individual trade. ChartMill can calculate this quickly and fully automatically with the easy-to-use Position Sizing Tool.
The software calculates how many shares you may/can buy based on your available trading equity. In the screenshots below we assume a trading capital of $25.000 and the maximum risk% is set at 1%.
A defensive stoploss is set at $32,28. The PST-Tool gives a warning if the stoploss is less than 2ATR (Average True Range) from the entry. In this case, however, the warning is incorrect because the tool only takes into account the current ATR position and this example dates from early June 2021, when the ATR value for the stock was approximately $1.35.
Thus, twice the ATR range means a stoploss that should be at least $2.70 lower than the entry. This brings us in this example to $33.02 which is still well above the defined defensive stoploss. With the defensive stoploss, the potential risk/reward (R/R) for this position is about 2.55 which is not bad at all.
If the more aggressive stop is used at $33.84 then we do end up below the intended 2-ATR value. In this case at about 1.2 ATR if we take into account the ATR value at the time of entry. Of course, this is a personal consideration and it is closely related to your personal investment style. But as you can see for yourself, this tool gives you information that you might not have even considered. You can find an extensive article about all functions of the Position Sizing Tool via this link .
When using the more aggressive stoploss, the R/R ratio rises to nearly 4.7. You could argue that in this case the more aggressive stoploss was definitely the better choice... But would you still believe that if after the entry the price fell below this shorter stoploss and then rose again to where it is now?
Bottom line, the candles on the chart after the long position was triggered were not there at the time of the entry, so a defensive stoploss certainly remains a well-considered choice.
The 5-minute chart is shown above. The green long candle is the opening candle on the date of September 21, 2021. As seen on this intraday chart an ascending triangle pattern was visible. The price immediately breaks through horizontal resistance with lots of momentum.
This is quite noticeable by the fact that this is a huge green candle that closes strongly above the horizontal resistance. Just like with the break-out from the bull flag pattern it is tempting to open a long position during the break-out. As a short term trader this is certainly worth considering but keep in mind that you have no confirmation of the break-out until the candle closes above it. In this case it turned out well and the position was never in any danger.
As soon as the first candle closes below the SMA, move the stoploss just below the low of that candle. IN this example i’ve used a SMA20 but if you want to give the price a little more room you can opt for an SMA50.
As soon as the first candle closes below the ascending trendline, move the stoploss just below the low of that candle.
As soon as a new higher high is established, move the stoploss to just below the most recent higher low.
ChartMill allows you to place an ATR (Average True Range) stop directly in the chart as a reference. You can choose to use 3, 4 or even up to five times the ATR value as the stoploss level. The stop is effective immediately once the price falls below that stoploss line.
The stop price is moved up or down every time a 5 or a 7 bar pattern is discovered.
To set this 5 or 7bp stop, place the cursor on the price level where you have set the initial stoploss. Then right click and the following menu appears. Pick the appropriate stoploss and a preferred color.
Flag patterns, like other technical patterns, are ideal tools to time your entry in the market. Merely recognizing the pattern on a chart however, is not a free ticket to open positions blindly. As has been shown in this post, there are numerous other elements that must be considered in order to be retained as a valid pattern.
ChartMill offers the possibility to have the software screen for bull or bear flag patterns on a daily basis. So you don't have to waste time manually searching for setups. Select the best low risk setups from the list provided by ChartMill (based on the points explained in this article) and make sure your entry- stoploss- and position management are on point!