Things You'll Need:
- Online Brokerage Account
- Real Time Charts
- Basic Knowledge of Technical Analysis
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Step 1
First, it is key to spot the bear flag pattern to trade it accordingly. A bear flag will normally form after a rising trendline has been broken. The bear flag is a downside continuation pattern that can be spotted by parallel rising lines after a sharp drop. True to its name, it looks like an upside down flag on a candlestick chart. On the chart I have drawn the rising trendline in Yellow, and the flag pattern in Green. Notice the long candlestick (flagpole) followed by candlesticks that rise in a consolidation like pattern to make a flag.
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Step 2
After spotting a bear flag pattern, you will be looking to enter a short position as you expect the downside to continue. Wait until a candlestick closes outside of the flag pattern before entering your short position. On the chart, I have circled a candlestick in white that closed outside of the bear flag before the big drop in price came.
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Step 3
Like every other trade, nothing is 100% guaranteed so it is important to place a stop loss in order to avoid a big loss if the trade goes against you. I would recommend placing a stop loss just above the lower rising trendline of the bear flag pattern in case it breaks back into the flag and then continues higher.
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Step 4
Once your trade is entered and your stop loss is set, it's time to decide when and how much profit to take. Technical analysis makes this easy and takes the guesswork out of it. Calculate the length of the flagpole on the bear flag pattern and apply this to the point in which price broke out of the bear flag. The length of the flagpole is $.24 from $12.12 down to $11.88. The pattern played out perfectly as you would expect the price to drop $.24 and touch at least $11.65 as it did soon after price broke down out of the bear flag. On the chart, I have drawn another green line to indicate the target move of the pattern. Take your profit and begin searching for your next trade.
