What Is A Bear Flag Pattern?
A bear flag, also known as a "bearish flag" is a technical analysis bearish continuation chart pattern that signals a continuation of an existing downtrend. A bear flag leads to a further decrease in the price of a market.
A bear flag forms when there is a steep decline in the price of a market, followed by a period of a slightly rising price consolidation period in the price action.
A bear flag resembles a "flag pattern" or the shape of a flag turned upside down.
According to John Murphy's book, "Technical Analysis Of The Financial Markets", flag chart patterns are considered some of the most reliable of all the chart patterns within technical analysis (1).
Bear Flag Components
In order to identify a bear flag chart pattern on a price chart, there needs to be a particular set of components displayed on the price chart of the market.
The components of a bear flag are:
- A flagpole: This is a downtrending line that illustrates the strong directional move down in prices in the market. It is knowns as the "flagpole" of the bear flag.
- A rising support level: This is the rising support level in the bear flag. It connects the swing lows together and is the area where shorts are entered with the price breaks below this level.
- A rising parallel resistance level: This is the upper resistance level of the bear flag. It connects the swing highs together and is the place where traders usually place their stop-loss orders when shorting.
Bear Flag Chart Pattern Examples
Below are visual examples of the bear flag pattern on the price charts in different markets.
Example Of A Bear Flag Pattern In The Stock Market
In the above price chart of Affirm Holdings, a bear flag formed.
After the price breaks out of the bear flag, it results in a steep price decline over the next few weeks.
This is an ideal example of a bear flag leading to a continuation in the bearish price trend in the price action.
Example Of A Bear Flag Pattern In The Commodities Market
In the above price chart of Soybeans futures, a bear flag formed which lead to a rapid price decline.
Example Of A Bear Flag Pattern On A Shorter Timeframe Price Chart
The above 1-minute price chart of Facebook stock shows a bear flag chart pattern.
Bear flags can form on any timeframe. On this shorter timeframe chart, the bear flag pattern lead to a quick move lower in the prices over the next hour after the pattern formed.
Example Of A Bear Flag Pattern On A Longer Timeframe Price Chart
In the above weekly price chart, there is an example of a longer timeframe bear flag pattern.
Once the price breaks down from the flag, it leads to a multi-week downtrend in the price.
Bear Flag Pattern Timeframes
Bear flag chart patterns can be found on any timeframe price chart. Popular timeframes used for trading bear flags are:
- 1-minute charts: This timeframe is used by scalpers to quickly short bear flag breakdowns and take quick profits. A holding period for a scalper shorting bear flags is a few seconds to a few minutes.
- 1-hour charts: This timeframe is used by day traders to trade bear flags and hold a position from a few minutes to a few hours intraday.
- Daily charts: This timeframe is used by swing traders to short bear flags with a holding period of a few days to a few weeks.
How To Find Bear Flag Patterns
The methods to find bear flag patterns are:
- Use a bear flag chart pattern scanner: This is an automated and quick way to scan for bear flags in various markets.
- Manually browse through price charts: This is a more manual approach and involves a trader manually scrolling through price charts and trying to spot the bear flags for themselves.
New traders should choose to manually browse through the price charts to find bear flags first as it will help with learning about the pattern.
Bear Flag Pattern Benefits
The benefits of the bear flag pattern are:
- It helps identify a potential bearish move: A bear flag pattern can help a trader find potentially large bearish price moves in the markets.
- It can be applied to any market: A bear flag can form in any market and is not restricted to just a few.
- They are found on multiple timeframes: Bear flags can be found on any timeframe and are not restricted to just one timeframe.
- They offer a great risk-reward ratio: A bear flag can offer a great risk-reward ratio on short trades with a very small risk for potentially larger profits.
These are the main benefits of the bear flag chart pattern that traders should be aware of.
Bear Flag Pattern Limitations
The limitations of the bear flag pattern are:
- They can signal many false breakouts: A bear flag can trigger a short prematurely quite often.
- The pattern can fail and the price may reverse: The bear flag can fail and reverse completely in the opposite direction which is why risk management is so important.
Frequently Asked Questions About Bear Flag Patterns
Below are frequently asked questions about the bear flag chart pattern.
Are Bear Flag Chart Patterns Bullish?
No, a bear flag chart pattern is not bullish. It is a bearish pattern that signals potential continued price declines in a market.
Can A Bear Flag Be Used With Other Indicators?
Bear flags can be traded with other technical indicators. Traders use popular indicators like moving averages and the R.S.I indicator to complement bearish flag patterns.
What Tools Does A Trader Need To Find A Bearish Flag Chart Pattern?
The tools needed to find bear flags in the market are:
- Charting software: A trader will need access to a charting software tool. This will give them access to the price charts of the markets where the bear flags will be found.
- Annotation Tools: A trader will need access to drawing tools so they can annotate onto the price charts and draw the bear flags as they find them.
Another tool worth considering is a chart pattern software scanner. It is not necessary but it can save a trader a lot of time by having a pattern scan the markets for the bearish flag patterns.