In this article, you will learn what is a bearish flag pattern. Cryptocurrency is often misunderstood as a complicated financial instrument to trade in the black market. In its purest form, cryptocurrency is much like forex. It is a medium of exchange, albeit not a legal tender.
Hence, most of the continuation patterns that work in the traditional forex market can be used for trading cryptocurrencies.
What is a Bearish Flag Pattern?
A bear flag pattern is a formation that is usually distinguishable on the candlestick chart. It is formed from the flagpole, which is the steep downward move before the pullback, and the flag itself represents the actual retracement.
As it is a trend extension, the bear flag chart is regarded as a trend continuation pattern. Initially, the price pattern will trend downward until a new support level is formed.
This is when the flag emerges in the form of an upward consolidation channel. After a while, the price breaks below the support level of the flag and continues the bearish trend. This signals cryptocurrency traders to open short positions so they may benefit from the price decline.
How to Identify the Bear Flag Pattern?
The bear flag pattern has two key elements: the pole and the flag. Other elements to pay attention to are the volume indicator and the breakout. Here is what you should look for on the chart:
First, you have to determine the flagpole, which coincides with the initial price decline driven by strong bearish momentum. At this point, the downward movement can be steep, while the volume indicator may ascend.
Next, the bear flag can be seen in the form of a consolidation channel that comes after the price decline. This is when the price movement starts to pull back, as the channel is looking upward.
There are two potential outcomes: Either the price movement continues to move upward or it breaks below the channel and retakes the general downtrend. In the first scenario, we don't get the flag pattern at all, as the downtrend is reversing. However, If the second scenario occurs, we can go short after the price breaks below the flag's support.
Finally, when the price breaks below the consolidation channel (the flag), we can place Sell orders. Most traders use the flag pole to measure the profit target. In other words, the distance of the flag pole can be used to calculate how far The price pattern may decline. However, more conservative traders can rely on a more compact profit target, which equals the height of the flag channel.
Bottom Line
To minimize risks and potential losses, a savvy crypto trader will practice the pattern's rules on a demo account, or start with small amounts of funds. This will help you to more easily identify the flag formations, and implement the rules accordingly. This article is about what is a bearish flag pattern.
