swing trading

Bull Flag Chart Pattern - How It Works and How Traders Can Use It

Stock Market Guides is not a financial advisor. Our content is strictly educational and should not be considered financial advice.

When it comes to the stock market, sometimes you might hear the term "bull flag" mentioned. It refers to a stock chart pattern that is popular among active stock traders.

This article will explain what a bull flag chart pattern is and how traders might be able to benefit from using it.

 

What Exactly Is a Bull Flag?

A bull flag is a stock chart pattern characterized by three trend lines.

The first trend line is on the left side of the pattern and is typically a steep upward sloping line. This is considered the "flagpole" of the bull flag pattern.

The other two trendlines serve as the "flag". They run parallel to each other to form the shape of a rectangle with its right side tilted downward.

The top flag trendline is a downward sloping line of resistance that connects the price peaks. The bottom flag trendline is a downward sloping line of support along the bottom that connects the price troughs.

The rectangular flag pattern connects to the top of the flagpole in a bull flag.

 

 

That image is a graphical icon that gives an idea visually of what a bull flag chart pattern looks like.

 

What Does a Bull Flag Look Like On A Stock Chart?

The image below is an example of a bull flag as shown on one of our stock charts.

 

 

There are golden lines on our charts that automatically outline chart patterns when they're detected.

You can see the steep line on the left that serves as the flagpole.

You can also see the rectangular flag that has a downward sloping top line where the resistance level is and a downward sloping bottom support level. The flag connects to the top of the flagpole.

All three lines make up the pattern. A bull flag is a type of pullback pattern.

 

How Do Traders Use a Bull Flag?

The appearance of the bull flag pattern indicates that there was a recent price surge (the flagpole trendline), and since then the price has been going downward in the fashion of a slanted range (the flag).

During the range period, the price is making a series of lower lows and lower highs (indicating selling pressure).

Since the consolidation was preceded by a price surge, traders might anticipate that the stock price will resume its climb if it either breaks upward out of the flag pattern (a breakout), or if it reaches the bottom trendline of the flag pattern (bounce off support).

 

Is a Bull Flag Bullish or Bearish?

Bull flag chart patterns are considered bullish, as the name implies, meaning that the presence of a bull flag on a stock chart might be an indication that the stock price is on the verge of going up.

Since a bull flag is considered bullish, it means traders might try to capitalize by going long (meaning that they would be buying instead of shorting).

The key points that might merit a bullish investment are when the price is near the bottom of the bull flag, or right after the price has broken through the upper trendline. The latter is sometimes referred to as a bull flag breakout.

 

How Do You Find Stocks That Have Bull Flag Patterns?

You can find them by using our Bull Flag scanner. It's a free tool we offer here at Stock Market Guides. It uses our proprietary scanning technology to find stocks that are in a bull flag chart pattern.

Here's how the scanner results look:

 

That tool ensures that you don't have to waste time flipping through stock charts manually to find stocks with a bull flag pattern.

You can also find stocks with bull flag breakouts on our Breakouts scanner.

 

Example of a Bull Flag Trading Strategy

For this example of a bull flag trading strategy, we're going to use a daily chart, where each price bar represents one day of price activity. That means it would be a swing trading strategy where the trade is designed to last more than one day but not for the long haul.

 

Entry for the Bull Flag Trading Strategy

The entry for this Bull Flag trading strategy will be as follows:

The entry criterion for our Bull Flag trading strategy is very simple. You can see in the stock chart below for Agilent that the entry price would be right around $62, where that upper golden line is.

 

 

Exit for the Bull Flag Trading Strategy

There are a lot of possibilities here for the exit.

One benefit of using a stock chart pattern as a basis for making trades is that the pattern itself can help you determine exits in some cases.

For any given trading strategy, it can be helpful to define three different criteria for the exit: profit target, stop loss, and time limit.

Not everyone uses all three, and that's totally fine. Ultimately, you can set these values however you want. But for the purposes of this strategy example, we will define all three:

 

1. Profit Target

We will set the profit target at 2 ATRs away from the entry price.

ATR is an indicator in the stock market that measures a stock's recent price volatility. Most trading platforms have it available as an indicator you can enable.

Our profit target criterion indicates that we will take the ATR value of the stock, multiply it by two, and add it to the price we paid when we bought the stock. That will be our profit target and we can set up a sell limit order at that price.

2. Stop Loss

We will set the stop loss at 2 ATRs below the support line (the bottom trendline of the bull flag). This means we take the ATR value of the stock, multiply it by 2, and subtract it from the price of the lower trendline from that day.

That will be our stop loss and we can set up a stop order at that price.

3. Time Limit

We will set the time limit as one week since this is a swing trade. If the stock has not hit either the profit target or stop loss by the time limit, then we will close the trade manually at the opening bell seven calendar days after entry.

 

How Well Do Bull Flags Actually Work?

The idea of a bull flag trading strategy sounds nice to many people because it offers a clear, easy-to-understand way to find and manage a trade setup.

But does it actually work? Can traders indeed generate profits by trading bull flag chart patterns?

That's exactly what our company can help answer for you, since our scanner technology has allowed us to do our own research on that precise question.

The answer is that trades based on a bull flag are not always profitable, but for certain stocks they might indeed have a track record of success according to our backtest research.

Here is some data that shows how a proprietary bull flag trading strategy we created has performed historically according to backtests:

 

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Anyone who signs up for our swing trading scanner service will be able to see stocks that qualify for that trading strategy in real time.

 

Learning More About Bull Flags

You can contact us any time if you would like to ask any questions about bull flag or anything else related to the stock market.