What Is A Bull Flag Pattern Failure?
In technical analysis, a bull flag pattern failure, also known as a "failed bull flag pattern", is when the price chart of a market forms a bull flag pattern, the price breaks out and moves slightly higher above the resistance level of the bull flag but fails to continue increasing in price and instead reverses and moves lower in a bearish direction.
A bull flag pattern is considered a failed bull flag pattern when the price reverses from above the breakout level to below the swing low price of the bull flag support level.
Failed Bull Flag Pattern Components
In order to identify a bull flag pattern failure, there will need to be certain components on the price chart of a market.
The components of a failed bull flag pattern are:
- A bull flag pattern: There will need to be a bull flag pattern visible on the price chart with a clear rising flagpole and two parallel resistance and support levels.
- A price movement above the resistance level: The price of the market will need to break out from the pattern resistance level. This is where traders enter buy trade positions.
- A bearish price reversal: The price should fail to continue higher after the breakout of the pattern. Instead, the price reverses from above the breakout level and moves back down and trends lower to below the swing low price of the support level of the pattern
- Declining volume on the breakdown (optional): Ideally, there should be little buying volume as the price breaks out from the bull flag. This is a hint that traders do not have the conviction that the market price will increase and trend higher. This is an optional component.
Once these components are visible, the pattern is considered a bull flag failure as it trapped buyers and stopped them out.
Bull Flag Pattern Failure Examples
A bull flag pattern can fail in any market where it forms. Below are visual examples of failed bull flag chart patterns on the price charts of various markets.
Example Of A Failed Bull Flag Chart Pattern In The Stock Market
On the daily price chart of Genpact Ltd. stock, there is an example of a failed bull flag pattern.
The price of Genpact stock trends higher initially before consolidating, forming the bull flag.
The price of the stock breaks out of the resistance level before failing to move higher. The price then reverses and starts to rapidly decline switching from bullish price action to bearish price action.
Example Of A Failed Bull Flag Pattern In Forex
On the price chart of USD/CAD currency, there is an example of a bull flag pattern failure.
The price of the currency pair breaks out from the bull flag initially before struggling to go higher in price.
The price reverses into a steep downtrend, switching from bullish price action to bearish price action.
Example Of A Failed Bull Flag Pattern On A Shorter Timeframe Price Chart
On the above shorter-term hourly price chart of Soybean futures, there is an example of a failed bull flag pattern.
It is a failed bull flag because it near hit the price target when trading these patterns.
The price initially breaks out of the bull flag and moves higher before reversing and quickly declining in price.
Bull Flag Pattern Failure Causes
There are a number of reasons a bull flag pattern can fail. The causes of failed bull flag patterns include:
- Lack of buying volume on the breakout: A lack of buying volume when the price of a market breaks out of the bull flag can cause a bull flag pattern to fail. If there is only a few buyers after the price breaks out, this can be an indication that traders are not confident in the market price trending higher.
- Negative economic or political news: Negative economic or political news can cause the price of a market to reverse from bullish to bearish and cause a bull flag to fail.
- A major resistance level above the bull flag pattern: A major resistance level above the bull flag pattern can mean the price of a market will struggle to go higher. This can mean the bull flag will fail at the major resistance level and reverse to much lower prices.
How To Trade A Bull Flag Pattern Failure
Some traders have developed trading strategies around trading failed bull flag patterns rather than trading the bull flag pattern in its most common way of buying a breakout.
To trade a failed bull flag pattern:
- Wait for the price chart to form a bull flag pattern
- Wait for the price to break out from the pattern resistance level and move slightly higher
- Once the price breaks out, wait to see will the price reverse from above the resistance level to back down below it
- Enter a short trade once the price breaks down below the previous resistance level of the bull flag pattern
- Put a stop-loss order at the prior swing high price that formed after the initial breakout
- Set the price target by taking the distance of the flag pole and subtracting that distance from the short entry price
Frequently Asked Questions About A Bull Flag Pattern Failure
Below are frequently asked questions about failed bull flag chart patterns.
Is A Failed Bull Flag Bullish Or Bearish?
A failed bull flag is a bearish signal in the market. A bull flag indicates that the price may go higher on a price breakout. When the pattern fails, it indicates that buyers were unable to push the price of a market higher and instead the price reverses and declines in a bearish trend.
Can A Trader Trade A Failed Bull Flag Pattern?
Yes, a trader can trade a bull flag failure by waiting for a bull flag pattern to form, the price of the market to break out of the resistance level and then fail.
Once the price fails to continue higher in a bullish trend and reverses to below the prior resistance level, a short trade is entered.
Is It Hard To Spot A Failed Bull Flag Pattern?
No, a failed bull flag pattern is easy to find as there are not many components to learn. It is simply the process of finding bull flags on price charts and waiting to see can the price continue to increase. If the price cannot continue higher and reverses, then it is a bull flag pattern failure.
What Timeframe Of Price Chart Can A Bull Flag Pattern Fail?
A bull flag pattern can fail on any timeframe of price chart from shorter term 1-minute price charts to much higher timeframe weekly and monthly price charts.