Bull Flag pattern
The bull flag pattern is found within an uptrend in a stock. Flags are named after the resemblance of the chart pattern to a flag flying from a flagpole.
A bull flag occurs in a rising market within an upward trend and is the flag that most accurately reflects the description. The flag is characterised by a series of lower highs and lows that do no break out above the first high at the flagpole. A true flag should retrace slightly against the trend.
The bull flag is a continuation pattern and only slightly retraces the price advance that preceded it.
The flag establishes a number of possible buy points depending on how aggressive the trader wishes to be. These may be when the price breaks above the upper trend line of the flag or when the price breaks above the highest high of the flag pattern.
The bull flag should be read in conjunction with the volume. The best flags are clearly visible with strong upward price thrusts with good volume to form the flagpole followed by the retracement with a slight downward movement with volume decreasing indicating a lack of conviction by the market the the price is going in the right direction. It should be possible to draw parallel trend lines on the top and bottom limits of the flag pattern giving the appearance of the flag.
As we are about to delve into flag patterns and flag trading I thought it would be useful to go back to basics and dig up the consensus opinion of what a chart pattern is. The following definition of chart patterns comes from Wikipedia.
A chart pattern is a pattern that is formed within a chart when prices are graphed. In stock and commodity markets trading, chart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period of time. Chart patterns are used as either reversal or continuation signals.
Some people claim that by recognizing chart patterns they are able to predict future stock prices and profit by this prediction; other people respond by quoting "past performance is no guarantee of future results" and argue that chart patterns are merely illusions created by people's subconscious. Certain theories of economics hold that if there were a way to predict future stock prices and profit by it then when enough people used these techniques they would become ineffective and cease to be profitable. On the other hand, if you can predict what other people will predict the market to do then that would be valuable information.
As you can see there are some very differing views. It seems to me that many trading methods are successful, especially for those who focus on a particular method and manage to establish the exact environment in which a particular price movement takes place. After all, it is only like driving or playing chess. When certain situations develop there is a recognised strategy for both taking advantage of it or avoiding the risks arising. It is the ability to fine tune your understanding of the environment that makes the difference between success and failure.
Flag chart patterns are one of the simplest chart patterns in technical analysis and are frequently overlooked by traders as their education proceeds and they move on to more complex strategies.
Yet the word is that those chart patterns, both bull flag and bear flag are the basis of a new product being developed by Guy Cohen, author of the successful option trading strategy that he refers to as Illuminati-Trader.
As Guy has explained on his blog the trading conditions for his favourite options straddle strategy have not been good over recent months as the markets are going through dramatic changes. Yet at the same time some of his customers have been reporting dramatic success using only a single element of Illuminati-Trader.
Guy's Tradefinder online software to which his customers gain access is fine tuned to locate suitable breakout candidates including bull and bear flag chart patterns. Under his guidance and using just this element his customers have been reporting some great success. The result is that he has been developing a new product for release in the near future that he tells me is going to be called, wait for it; 'Flag Trader' surprise, surprise.
Indications are for a release in the next few weeks so look out for more information on Flag Trader. We will be bringing you our own views on the subject just as soon as we have worked our way through the preview copy we are currently taking to pieces.
