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A bullish flag is a technical analysis pattern that appears in stocks with a strong uptrend. It is considered a continuation pattern, as it indicates that the stock is likely to continue its upward movement.
This pattern is named after the flag on a pole, where the pole represents a vertical rise in the stock price, and the flag represents a period of consolidation. The flag can take on different shapes, but what's important is the psychology behind it. Bulls keep buying shares, preventing the stock from dropping significantly despite a strong rally.
The breakout from a bullish flag typically results in a powerful higher move, matching the length of the previous flag pole. It's important to note that this pattern works in reverse as well and is known as a bear flag. Bullish flags usually appear with a new market rally. The tighter the flag pattern, the stronger the signal is considered to be.
There are five main characteristics of flag patterns:
<source: contentstack>
This pattern indicates a potential increase in the stock price. The flagpole demonstrates a significant rise in the stock price, followed by a consolidation period. This shows that buyers are actively buying the stock without waiting for lower prices. The target price for a bull flag is calculated by measuring the length of the flagpole and projecting it from the breakout point.
The chart above shows a rectangular bull flag pattern, and there is clear evidence of buying every time the stock dips, as seen by the long lower tails on the candles. Bull flags typically exhibit a specific volume pattern where there is a surge in volume during the formation of the flagpole, followed by a significant decrease in volume as the stock price consolidates. The breakout from the bull flag often results in another increase in volume, although the increase may not be significant.
<source: thinkmarkets>
The chart above shows a breakout from the bull flag pattern, with the top of the flag clearly defined. While there is a possibility of the stock continuing to rise rapidly, it is common for a stock to retest the breakout area a few sessions after the breakout, providing an opportunity for a second entry.
<source: morpheustrading>
The chart above displays a tight bull flag pattern, which is considered to be a good performer and provides easily identifiable stop-loss levels. Typically, bull flags tend to resolve in less than three weeks, and over longer periods, they tend to form a rectangular or triangular pattern.
It is impossible to predict with certainty whether the current market rally will continue or not, and traders should focus on the price action and let the probabilities guide their decisions. Although all chart patterns are vulnerable to false signals and unexpected movements, bullish flags are considered to be one of the most reliable and effective patterns.
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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.