The bullish flag is a bullish continuation pattern that gives the trader an opportunity to enter a hot stock. It is a trend following pattern that also gives a price target. In a sense it is a two in one pattern. It tells you that the stock is very likely to move higher and it also tells you the possible price target for the subsequent movement. Therefore, this pattern is a very good pattern for traders to utilize and add to their arsenal of trading strategies.
This is what a bullish flag looks like.
There are a few requirements:
The chart above shows MCRB with a bullish flag pattern. It had a rapid rise and then the stock corrected in a channel type of movement. The trader can draw an upper trendline and a lower trendline to make it easier to see. The stock started to move higher when it broke above the upper trendline.
It is easy to get an initial target for the stock. The channel is considered to be the middle of the move and therefore, the trader can take the height of the previous move and then project it upwards from the base of the channel. If you look at the chart of FCFS above, you will notice how the stock met the initial price target and quickly decline. But since it is in an uptrend, the trader can use it as an initial target and sell half of his position. He can ride the other half higher.
Whether you should take full profits or half profits depend on whether the stock is in an uptrend or not. It also depends on whether there is lots of price resistance at the target area. If there is a lot of resistance there, it will be better to take more profits off the table or even take all the profits off the table. This is where trade management and support and resistance analysis comes in to play to help you be realistic with the price target.
Now that we have learn about the construction of the bullish flag and how the pattern looks like, we are now ready to learn how to trade this chart pattern. The bullish flag is a:
The name by itself implies to us that it is a bullish pattern. Since there is a previous rapid move to the upside, this pattern is a continuation pattern and also a trend following pattern. One of the best ways to trade the stock market is to follow the trend because as the saying goes "The trend is your friend". Choosing to trade the bullish flag is a viable trading strategy that will produce good results for the trading account in the long run.
The chart of IRM above shows a good example of how to trade the bullish flag. First of of, the stock had a nice rapid move to the upside. The stock then drifted lower and the trader can draw a channel type of line across the correction. Notice how the stock also touched the rising 20 MA which hinted of a bullish move upwards.
The trader can buy the stock the moment it breaks above the upper trendline. Then he or she can place a stop below the channel lines. To get an initial target for the upwards move, the trader can take the height of the previous move and project it upwards from the base of the channel.
When the stock reaches near the target, the trader can sell 1/2 or 1/3 of his position. Depending on the strength of the trend, the trader can choose to trail the stop loss or sell all of the position. If you think that the stock has a strong trend, then you can sell 1/2 of your position and ride the other half higher. However, if there is resistance overhead, you might want to take all of the positions off the table.
Experience will help you to make the best decision.
Not all bullish flag patterns follow the textbook version. Some bullish flag breakouts happen faster while some will happen a bit slower. Some may drag on a bit and become a bit overextended making the trader lose interest in the stock. Just when the trader has abandon monitoring the stock, the stock will break the upper channel and shoot higher.
That is why you need to be aware of the variation that comes with chart patterns. Don't just take a pattern the way you see it in the textbook. Learn to spot the variations and respect them.
The chart of AVAV above shows a bullish flag variation. Notice how AVAV shot up higher rapidly in July? The stock then corrected and drifted lower. The trader might start to suspect a bullish flag pattern here. However, the stock did not shoot up but continued to drift lower for an extended period of time.
The trader can still draw a channel line on the stock. The stock broke above the channel line in August but immediately drifted lower again. This can be frustrating at times for the trader. Then in September, the stock gap up and completed the extended bullish flag pattern and even met the 1st target.
In trading, nothing is perfect all the time. Sometimes the pattern works very fast and at other times they take a long time to form. Yet at other times the chart pattern will fail. That is why it is so important to have a trading plan and a stop loss. We can't manage the ups and downs of the stock market or a single stock but we can manage how we deal with each situation.
After meeting the first target, AVAV looks like it is setting up another bullish flag pattern. The last time I checked the price of the stock, it has moved up a bit from the time I downloaded this chart. If the bullish flag pattern is successful, the possible target for this second bullish flag is around $62.
ENV is another good example of a variation of the bullish flag. This stock had a rapid one day rise and then it drifted lower. At one point the stock had a massive drop only to recover all the loses and form a bottoming tail at the end of the day. This told us that the stock was rejecting lower prices.
The stock continued to drift lower but the trader can still draw a channel line across prices. When the stock broke above the upper trendline, the trader can enter this stock. This stock has already met its 1st target price and the trader who played this bullish flag pattern could take at least 1/2 of his positions off the table.
This is a stock that was brought into my attention by a friend in the US Market Telegram Group. It is one of those property stocks listed in Hong Kong that had a rapid rise this year. The others were Sunac and Evergande and their rapid rise was because of investors appetite for a better prospect in the property sector in HK and China.
Kaisa Group had a rapid rise in late August. It formed a topping tail but instead of correcting lower, the stock just drifted lower. The trader can actually draw a channel line across the prices. The stock formed a bullish flag and then broke higher. It then quickly met its 1st profit target. Traders can take 1/2 or 1/3 of the positions off the table. Then the stock jumped a bit higher and corrected. Kaisa Group is a great example of a nice bullish flag pattern that generated good profits for traders who were observant.
The bullish flag chart pattern is one of the many ways that you can use to play a hot stock. The next time you see a stock rising very very fast in a short period of time, put it in your watchlist. Monitor it over the days and weeks as it corrects. When it forms a bullish flag pattern and breaks above the upper trendline, press the buy button. Find and play these kind of stocks and you can make a living in the stock market.
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