On the other hand, if the pattern is bearish, then the stop loss order should go above the highest point of the 2nd wave. The first wave of the Measured Move pattern acts as a reversal to the current trend. After the first wave develops, a second wave acts as a correction or a consolidation to the first wave. Then, after the second wave is finished, a third wave forms on the chart. The third wave is the one that we are waiting for to initiate our position. The third wave will resume in the direction of the first wave, and the target for the third wave is equal to the length of the first wave.
That’s why we have other chart patterns, such as the ascending triangle if the price needs more time to develop. Here’s an example of a simple bull flag chart continuation pattern. To put it simply, a bull flag pattern signals that although there may be a temporary setback, a positive price trend is likely to continue. Upon breakout of the lower channel line, we expect to see a continuation of the prevailing bearish trend. Most times, after the Flag completes the two targets, you would want to close out the entire position and bank your profits.
Heavy Metal Breakouts: How Rising Commodity Prices are Lifting Canadian Construction Stocks on the Chart
We want to buy at the market as soon as the price breaks above the Pivot point B. The measured move chart strategy uses a very simple entry technique. Now we need to define our entry technique which brings us to the third step of the measured move chart strategy.
- Occasionally you’ll see pennants with a flat top or flat bottom.
- The shape of the flag is not as important as the underlying psychology behind the pattern.
- This basis for setting price targets in technical analysis is used with chart patterns such as flag patterns and pennant patterns.
- The drama of the chart escalates as AMZN’s price vaults over the flag’s upper boundary, propelled by a resurgence in volume.
- This provides sufficient evidence for us to enter a long trade on the USD/CHF pair.
Search this blog for “Bull and Bear Flags” for more information, or check out any reference on bull/bear flags. The key things to understand are the initial upward movement, the consolidation period, and the breakout. It’s possible to use this pattern regardless of your trading style, but be aware of the other factors involved in the price movement. Just because you see a huge price jump followed by a period of consolidation doesn’t mean it’s definitely going to spike again. Flat top breakouts on the other hand show highs on the same level. But if you know what to look for, and how to gauge your entry and exit points, you can use bull flag trading to increase your chances of success.
And in this case, the price went all the way down past the start of the flagpole. The flagpole is often generated by large institutions buying the stock. Small retail traders are not able to cause the chart to paint candles that look like that. This is shown with the purple and the magenta arrows on the chart.
We’re also going to provide you with a very clear step-by-step set of rules so you can trade the Measured Move chart pattern strategy by yourself. Here is a strategy you can read about and it’s called risk to reward ratio. Yes, the bull flag pattern tends to work better in trending markets. So in a downtrend, I’ll choose to skip the trade even if there’s a bull flag pattern formed. For profit objectives, the height of the initial pole serves as a yardstick. Extending this magnitude from the breakout point suggests a plausible profit horizon, guided by historical patterns.
Differences Between Bull Flag and Bear Flag
This approach is not about hasty gain grabbing but about charting a likely trajectory for the market’s ensuing chapter, enabling a dignified and profitable departure. Traders, in interpreting these patterns, draw on a deep understanding of market dynamics. Each bull flag type informs strategies for entries, exits, and managing risk, and they are critical for understanding market mood. Whether bull flag formation it manifests as a rectangular pause or a snug consolidation, the bull flag remains a potent indicator of a market gearing up to prolong its upward trajectory. Some bull flags are compact, displaying minimal price fluctuations and suggesting a market that is tightly coiled. A Rectangular Bull Flag is a specific type of Bull Flag where the consolidation phase takes a more rectangular shape.
Have you ever seen a stock exhibiting normal trading behavior and then all of a sudden the stock price drastically drops out of nowhere? This type of price action could be related to the announcement of a shelf offering or the execution of an “at-the-market” sale from… To draw a price channel, you need simply trade a line touching the highs and lows of a ranging market. Following all impulsive moves in the market is either a stark reversal or a period of consolidation. The flag of this pattern is such consolidation and is what you will be looking for to find this pattern.
How to Identify and Utilize Bull Flag Patterns in Your Trading Strategy
The measured moved chart pattern strategy is both a reversal and a continuation trading strategy. Mastering the identification and application of the bull flag pattern is crucial for enhancing your trading skills. Recognizing this pattern enables you to discern a continuation of favorable price movements, thereby yielding substantial profits. Thus, trading the bull flag pattern is a fusion of timing precision, risk management, and aspirational foresight. Imagine the bull flag as a map to hidden gold, with the initial pole marking the X that signifies the trend’s projected continuation. Timing an entry is like pinpointing where to dig; jump in prematurely, and you might be duped by a mirage, too hesitant, and you may find the prize has slipped away.
How to Trade the Measured Move Pattern
After this period of consolidation and the formation of a clear price channel, the market will inevitably break out to either side. The pattern is formed only when the price breaks out to the upside, triggering another move with the greater trend. It is a fragment of the BTCUSD price chart from the beginning of August 2021. It shows a clear flagpole, a flag, and the following uptrend.
Step 2: Buy the Breakout of the Upper Trendline
Trade up today – join thousands of traders who choose a mobile-first broker. Recently, we discussed the general history of candlesticks and their patterns in a prior post. We also have a great tutorial on the most reliable bullish patterns.
In general, chart patterns can be classified into two classes based on their potential price move – continuation and reversal. Today we will discuss one high probability continuation chart formation known as the Flag pattern. The following material will teach you how to recognize and trade the bearish and the bullish Flag pattern like a Pro. After a series of the smaller candles, the buyers reassume control of the price action and break the upper trend line to the upside, which activates the bull flag pattern. It calculates the potential stock price movement after a bull flag breakout by adding the length of the flagpole to the point of the breakout.
This signals that the upward trend continues and that traders can enter long positions. Bull flag patterns on stocks in a strong uptrend are considered strong continuation patterns. As with Flags, there are two types of Pennants – bullish Pennant and bearish Pennant. They are traded the same way as the Flag and the target rules are absolutely identical.