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How To Trade A Bear Flag Pattern

Patrick Stockdale
Written by Patrick Stockdale | May 31, 2022

A bear flag pattern is a bearish technical analysis chart pattern that signals that the price of a market is continuing in a bearish trend and the market will have further price declines.

A trader will use the bearish flag pattern to find short opportunities in a market.

The construction of a bear flag pattern involves the downward sloping flagpole which identifies the downtrend in the price of a market, and two parallel short upward sloping trend lines which represent the support and resistance level of the flag.

These components are important areas to understand when trading the bear flag pattern.

To trade a bear flag pattern:

  1. Enter a short position when the price of a market breaks the rising support line: A trader should enter a short trade position when the price of a market breaks down below the rising support level of the bear flag. Once the price breaks below this level, it triggers a short trade.
  2. Set a stop-loss level above the bear flag resistance level: A stop-loss order should be placed at the resistance level of the upward sloping resistance level trendline.
  3. Set price target: A price target is set by taking the distance of the flagpole of the pattern and subtracting it from the short entry price to get the target price for a bear flag trade.
  4. Watch for an increase in volume (optional): An optional step is to ensure selling volume increases as the price breaks down from the bear flag. This is not a required step but it can add extra confirmation that the price may continue lower as there is increased selling pressure.

Below are visual illustrations of every step of trading a bear flag pattern from entering into the trade to setting stop losses and setting price targets.

Bear Flag Pattern Entry Point

Bear flag short entry point

The first step of trading a bear flag pattern is entering into a short trade position.

The price chart above illustrates where a trader should enter a short trade when trading a bear flag pattern.

When trading a bear flag pattern, there are two potential areas for entering a short trade including:

  • Entering a short trade when the price of a market breaks down below the support level of the bear flag. This is the most common method of shorting a bear flag pattern.
  • Wait for the price to break down below the support level and come back and retest the previous support level to enter a short trade position.

The two different methods for entering a short trade when trading a bear flag are labeled as "Short entry" and "Alternative short entry point" on the price chart above.

Bear Flag Pattern Stop-Loss Level

Setting a stop-loss order when trading bear flag

The next step when trading a bear flag pattern is setting a stop-loss order.

When trading a bear flag pattern, there are two potential areas to set a stop-loss order including:

  • Setting a stop-loss order just above the swing high price of the resistance level of the bear flag pattern. This is the most common method used.
  • Placing a stop-loss order just above the candle before the price breaks down from the bear flag.

The two different areas to set a stop-loss when trading a bear flag pattern are labeled "Stop-loss level" and "Alternative stop-loss level" on the price chart above.

The traditional stop-loss level, which is placing a stop-loss order above the resistance level will have a lower reward to risk ratio but a higher win rate.

The alternative stop-loss level of placing it just above the candlestick before the breakdown will have a lower win rate but a higher reward to risk ratio.

Bear Flag Pattern Price Target

Bear flag price target

The final step of trading a bear flag pattern is setting the correct price target for the short trade.

A price target for a bear flag pattern is set by taking the distance from the swing high price and the swing low price of the flagpole and subtracting it from the short entry price after the price breaks down below the bear flag support level.

On the price chart above, the price target is labeled "Price target level".

Bear Flag Pattern Trade Examples

Below are chart examples of trading a bearish flag pattern in different markets.

Example Of Trading A Bear Flag Pattern In The Stock Market

Trading a bear flag pattern in the stock market

On the above daily price chart of Facebook stock, there is an example of trading a bear flag pattern from start to finish.

The price of Facebook gaps down and trends lower. This creates the flagpole area of the bear flag and will be used to set price target projections.

After a steep decline, the price starts to pull back in an orderly manner between a parallel support and parallel resistance level. This creates the bear flag.

Once the price of Facebook stock breaks down below the support level of the flag, a short entry is triggered (labeled " Short entry" on the price chart).

A stop-loss level is placed at the prior swing high price just above the resistance level of the bear flag (labeled "Stop-loss level" on the chart).

The price target area is set by taking the distance between the flagpole and subtracting it from the short entry price (labeled "Price Target" on the chart).

‍Example Of Trading A Bear Flag Pattern In The Forex Market

Trading a bear flag pattern in the forex market

On the daily price chart of EUR/USD currency pair above, there is an example of a bear flag trade.

The price of the currency pair trends lower. This forms the flagpole. The price then consolidates between a parallel level of support and resistance.

The price of EUR/USD breaks down below the support level triggering a short entry in the forex market (labeled "short entry point" on the chart).

The stop-loss order is placed above the prior swing high resistance area of the bear flag (labeled "stop-loss price" on the chart).

The price target is set by taking the distance of the flagpole and subtracting it from the short entry price (labeled "profit target" on the chart).

In this example, the price bounces almost perfectly off the price target level indicating that other traders were trading this bear flag the same way.

Frequently Asked Questions About Trading The Bear Flag Pattern?

Below are some frequently asked questions about trading the bear flag pattern.

Is It Hard To Trade A Bear Flag Pattern?

Trading a bear flag pattern is easy to do once a trader is familiar with how the pattern works.

There are only a few simple steps to follow which means traders tend to find it easy to spot the bear flag pattern and pick the correct short entry price.

Where Is The Best Entry Point When Trading A Bear Flag Pattern?

The best place for a short entry on the bear flag pattern is when the price breaks down below the support level, ideally on increased selling volume. This is a better option for an entry rather than waiting for a breakdown and then a retest as the market may not retest the level and a trader will miss the trade.

Is It Risky To Trade A Bear Flag Pattern?

Trading a bear flag pattern comes with risks like every pattern. However, risk can be managed by placing stop-loss orders and using the correct position sizing when trading the bear flag.

Can Bear Flags Be Traded In All Markets?

A bear flag pattern can be traded in all markets that allow short selling. As a bearish flag is a bearish pattern, traders need to be able to short in order to trade it and profit from it.