How to Day Trade a Bull Flag Pattern

More and more people are choosing to day trade stocks rather than buying and holding for the long term. This article will explain how to use technical analysis to trade a bull flag pattern with success. It assumes the reader has some basic knowledge of technical analysis and real time candlestick charts.

Difficulty:

Moderately Challenging

Instructions

Things You'll Need

• Online Brokerage Account
• Real Time Charts
• Basic Knowledge of Technical Analysis

1. 

   First, it is key to spot the bull flag pattern to trade it accordingly. A bull flag is a continuation pattern within an uptrend. It can be spotted by parallel downward sloping after a sharp increase in price. A bull flag, not surprisingly, resembles a flag on a candlestick chart. On the chart I have drawn the bull flag pattern in yellow. Notice the long candlestick that creates the flagpole which is followed by candlesticks that consolidate downward to form the flag.

2. 

   Once you have spotted the bull flag pattern, you will be looking to enter a long position as you expect the upside price action to continue. Wait until a candlestick closes above the flag pattern before entering your trade. On the chart, I have circled a candlestick in white that closed above the bull flag which led to a sharp increase in price.

3. No trade is 100% guaranteed to play out in your favor, so it is important to place a stop loss in order to avoid a big loss if the trade goes against you. I recommend placing a stop loss just below the upper declining trendline of the bull flag pattern in case price breaks back into the flag and continues lower.

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 actually eliminates any guesswork. Calculate the length of the flagpole on the bull flag pattern and apply this to the point in which price broke out of the bull flag. On the chart, you would begin at the candlestick circled in white. The length of the flag pole is about $.21, rising from $11.48 to $11.69. This pattern was near perfect as you would expect price to rise $.21 and touch at least $11.81 from the breakout point which is around $11.60. On the chart, I have drawn another yellow line to indicate the target move of the pattern. Once the target is reached, take your profit and begin looking for the next trading opportunity.

Tips & Warnings

• Be sure to exit your day trade based on the instructions above, or a good trade can quickly turn against you.

• Bull flag patterns are more likely to fail than other patterns so be sure to place a stop loss.

• Not all patterns will reach their target move, be ready to take profit even if the trade doesn't reach the target price.