Why Traders Should Avoid a Bear Flag Pattern Based On Data!

Bear Flags Do Not Provide a Good Opportunity for Traders, So Here's Why to Avoid Them.

A bear flag is a stock chart pattern in technical analysis that signals a potential continuation of a downtrend. The pattern resembles an upside-down flag on a pole. The pole is the initial drop in price, and the flag is a period of consolidation before another drop.

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My analysis, research and testing stems from 25 years of trading experience and my Financial Technician Certification with the International Federation of Technical Analysts.

Traders make a big mistake when using this pattern. Be careful when trading bearish flags.

According to published research, the bear flag pattern has a low success rate of 45% and a price change of +9%. This means you are flipping a coin when trading this pattern, as the odds are not in your favor.

The high-tight bear flag is the only flag pattern you should trade, and I will show you how to trade it.

A lot has been written about trading bear flags, but academic research into flag patterns suggests that only the bullish, high-tight flag is successful.

Key Takeaways

  • The bear flag pattern looks like an inverse flag with a pole. The pole represents a sharp price decline, while the flag represents a price consolidation.
  • A bear flag is a continuation pattern, suggesting the price will decline after the consolidation phase.
  • All bear flags should be avoided as they have a low probability of success.
  • Only the high-tight bull flag is worth trading, as it is 85% successful with a 39% average price increase.

Bear Flag Patterns

Bear Flag Patterns

What Is a Bearish Flag Chart Pattern?

A bearish flag is a popular yet widely misunderstood technical analysis pattern characterized by a rapid downward price trend followed by parallel upslope consolidation in price. The price decrease resembles a flag pole, while the price consolidation is the flag.

The bear flag is a continuation pattern and occurs during a volatile price decrease, followed by an upward price consolidation. The price consolidation is caused by short traders who profited from the strong trend taking profits, and traders looking for bargains.

An Example of a Bear Flag Chart
An Example of a Bear Flag Chart

Auto-detect this Chart Pattern with TradingView

Most flag patterns slope in the opposite direction from the previous trend, but some can be horizontal and resemble a rectangle pattern.

How Reliable is a Bear Flag Pattern?

A high-tight bear flag chart pattern has an 85% success rate on an upside breakout, achieving an average 39% profit in a bear market. If the bear flag is loose, the failure rate is 55%, with only a gain of 9%.

Chart Pattern Success Rate Average Price Change
High Tight Bear Flag 85% +39%
Bear Flags 45% +9%

Source Research Courtesy of Tom Bulkowski@The PatternSite.com.

Why Most Bear Flag Patterns Fail

There are three flag patterns: the bull flag, the bear flag, and the high-tight bear flag. Research on 1,028 trades shows that standard loose flag patterns have a failure rate of 55%. In contrast, a high tight bull flag pattern has a success rate of 85% with an average gain of +39%.* Source

We need to learn to identify them to distinguish between reliably profitable high-tight flags and failing bull/bear flags (loose flags).

How to Identify a Bear Flag Pattern

The key element of a bear flag pattern is that it must occur after a strong price decrease, which acts as the pole. It must be preceded by at least three consecutive lower daily price closes. This is followed by a consolidation period, creating the flag part of the pattern.

The size and shape of the flag will vary, though usually, it is an upsloping channel or triangle with either two parallel trendlines or several lower highs and higher lows. The volume should diminish as the price consolidates, and the price should stay within the boundaries of the flag.

Once confirmed, a bearish breakout occurs when the stock closes below the lower trendline of the flag formation; this signals that buyers have capitulated and that more selling will follow. The pattern is usually complete with a target projection equal to the flagpole height added to the breakout level.

Bear Flag Chart Pattern
Bear Flag Chart Pattern – Here, we see a failing bear flag; this happens 50% of the time.

This bear flag chart has been autodetected using TradingView’s pattern recognition algorithms. Notice how the target price is automatically calculated.

Auto-detect this Chart Pattern with TradingView

Above, we see a typical example of a bear flag failing. Instead of moving down, the price broke out upward and made a small new high before continuing further consolidation. The research shows bear flags only make a price move of 9% after a breakout. This is very low compared to inverse head and shoulders or double bottom patterns.

Identifying a Failing Loose Bear Flag

As defined in The Encyclopedia of Chart Patterns, a loose bear flag does not have an incredibly high/vertical flag pole, and the flag is not tight; it is loose. The chart above is an example of a loose flag.

This bear flag chart has been autodetected using TradingView’s pattern recognition algorithms. Notice how the target price is automatically calculated.

Is the Bear Flag a Continuation Pattern?

The bear flag pattern is considered a continuation pattern, but the evidence shows it is both a continuation and a reversal pattern. The bear flag has an almost 50% chance of continuing or reversing the trend. Considering the average change after the breakout is only 9%, it is not worth trading this pattern.

Our original trading research is powered by TrendSpider. As a certified market analyst, I use its state-of-the-art AI automation to recognize and test chart patterns and indicators for reliability and profitability.

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How To Trade a Bear Flag Chart Pattern?

I would not advise trading a bear flag. The bear flag is an unreliable indicator, as evidenced by thousands of trades tested in the Encyclopedia of Chart Patterns.

When trading a bear flag chart pattern, traders should wait for the price to break out in either direction and place a tight stop loss because this pattern is unreliable.

It is important to note that traders should wait for a confirmed breakout above the flag pole peak before entering into a trade, as false breakouts above or below the flag pattern can often occur.

Traders should pay attention to volume when trading a bear flag chart pattern. Higher volume on the upward breakout is often considered a trend confirmation. This means traders should be vigilant and wait for higher volumes before entering a trade on any breakout situation.

The Psychology of Bear Flags

The psychology behind a bear flag chart pattern is similar to that of other continuation patterns, except that it is more volatile. It reflects the market’s strong commitment to continue moving in the same downward direction despite any short-term consolidation. Traders should know the previous trend and ensure it’s still intact before entering a trade.

This pattern typically appears in strongly trending markets, where the bull (buyers) and bears (sellers) battle each other back and forth until, eventually, the bears gain more strength.

The Bear Flag Pattern Timeframe

Bear Flags can form in any timeframe but occur more frequently in hourly and daily charts. Flags happen quickly and usually last no longer than three weeks.

Identifying a Winning High-Tight Bull Flag

As mentioned, the only accurate flag pattern is a high-tight flag. This bull flag is where the flag pole moves nearly vertically, indicating buyers are willing to bid up the stock even if it’s at very high levels.

The flag is tight, meaning there is a close-fought battle between buyers and sellers over a period of days. Finally, the buying pressure is so strong that the price breaks upwards, and an explosive rally averaging +39% ensues.

One Bull Flag Pattern Succeeds 85%, The Rest Fail

What Happens After a Bear Flag Pattern?

Two decades of research by Tom Bulkowski show that after a bear flag pattern is confirmed on a price breakdown, there is a 45% chance of a successful trade averaging 9%. These are very poor probabilities.

What Happens with a Failed Bear Flag Pattern?

A bear flag in a bull market fails 55% of the time. When a bear flag pattern fails, the stock price fails to achieve the price target or reverses before reaching the height of the flag pole. At this point, it makes sense to discard the pattern.

How to Automatically Identify Bull & Bear Flags?

You can automatically identify flag patterns using TradingView. Go to TradingView and click Indicators > Technicals > Patterns. Next, select Bearish Flag Chart Pattern. Now, a chart with a bear flag pattern will be clearly marked.

Automatic Pattern Recognition with TradingView
Automatic Pattern Recognition with TradingView

Auto-detect Bear Flag Patterns with TradingView

What are the Bearish Flags Rules?

  1. Do not trade the bear flag.
  2. The bear flag patterns appear during powerful price declines.
  3. The flag pole should be near vertical.
  4. The flag should be tight with close price points.
  5. If the price breaks out lower, the pattern has failed.

The Best Chart Pattern Scanners

Two trading platforms currently offer pattern scanning and screening: TrendSpider and FinViz. Finviz is a good free pattern scanner, whereas TrendSpider enables full backtesting, scanning, and strategy testing for chart patterns.

TrendSpider Chart Pattern Scanning

Scanning for chart patterns with TrendSpider is easy. Visit TrendSpider, select Market Scanner >  All of the Following > Chart Pattern > Scan. You will be presented with a list of stocks with bearish patterns.

How to Scan & Backtest Stock Chart Patterns With TrendSpider
How to Scan & Backtest Stock Chart Patterns With TrendSpider

Scan for this Chart Pattern with TrendSpider

Using AI-Driven Technical Analysis

One of the major benefits of using AI-driven technical analysis tools like TrendSpider is the ability to backtest historical data. This allows traders to compare the performance of their strategy over different periods and markets. With TrendSpider, you can go back in time to find stocks exhibiting bear flag patterns and then use the platform’s advanced analytics tools to analyze how effective this pattern was for trading at any given time. TrendSpider’s AI-driven algorithms also help traders identify the most reliable entry and exit points for patterns.

Scan for Bearish Chart Patterns With FinViz

FinViz has a great feature for scanning for bear flag patterns. By selecting a bear flag as your scan criteria, you can easily find stocks exhibiting this pattern. This is especially useful to traders who want to monitor potential trading opportunities.

Set Up Stock Chart Pattern Scanning with Finviz
Set Up Stock Chart Pattern Scanning with Finviz

Scan for this Chart Pattern with FinViz

The first step to finding stocks with bearish patterns is to select a set of criteria. FinViz offers a range of pre-defined filters and sorting options, enabling traders to quickly narrow their search by sector, industry, market capitalization, and more. After selecting the desired criteria, traders can apply the filter to the Finviz screener.

Once the filter has been applied, traders can then view the results on a chart interface. Depending on the complexity of the search, several stocks may meet the criteria. By clicking on each stock name, traders can open up a chart.

FAQ

Is a bear flag pattern profitable?

No, a bear flag pattern is a weak signal for traders and is not profitable. It provides an inaccurate way to identify potential selling opportunities creating low-probability trades. Tom Bulkowski's research confirms an accuracy of 45 percent for bear flag patterns with an average profit potential of 9 percent.

Can a bear flag fail?

Yes, most bear flags fail. The typical bear flag identified is a loose flag which is less than 50% successful. Traders need to clearly identify high-tight bear flags for success.

How reliable is a bear flag pattern?

The bear flag pattern is an unreliable chart indicator, with success rates of 45 percent during a bear market and a low average profit of 9%. Only the high-tight bull flag is reliable.

Do bear flags hold?

Bear flag patterns hold only 45 percent of the time, according to decades of research compiled by Tom Bulkowski in his book The Encyclopedia of chart patterns.

How to identify bear flags?

Bear flag patterns can be identified automatically with TradingView. Alternatively, you can manually identify it by looking for a sharp price decrease (flag pole) followed by an upward parallel price consolidation (flag).

Is a bear flag a continuation or reversal pattern?

Testing shows that bear flags are reversal and continuation patterns. This means the pattern is not predictive and price could move in any direction, rendering the potential trade invalid.

What are the best bear flag pattern scanners?

The best flag pattern scanners are TrendSpider and Finviz. TrendSpider enables bear flag scanning, backtesting, and strategy development. Finviz enables quick and easy bear flag scanning and charting.

How accurate is a bear flag pattern?

Published research demonstrates most bear flags fail 55 percent of the time, but a high-tight bull flag pattern is 85 percent accurate on an upward breakout in a bull market. Source: The Encyclopedia of chart patterns

Can a bear flag be bullish?

Flag patterns can be bearish or bearish, but a bear flag is such a poor-performing pattern it can be bullish and bearish depending on the direction of the price breakout.

Is a bear flag good or bad?

The bear flag is a bad pattern for traders to use, considering the evidence. Do not trade bear flags, they have a 55% failure rate, and even if they succeed, they only average a 9% price increase.

What is the success rate of a bear flag?

According to Tom Bulkowski's research, the success rate of a flag is a 45 percent chance of a 9 percent price decrease in a bull market on a continuation of a downtrend. Traders should remember that there is a 55 percent false signal risk.

How do you target stop loss in bear flag patterns?

Traders should set the approximate target stop loss level in a bear flag at the point above the breakout of the bear flag. The exact percentage stop loss depends on the price target expectations and the timeframe.

What are the benefits of trading bear flags?

There are no benefits of trading bear flag patterns. The bear flag setup provides a very limited 9% gain and an erratic trend. Additionally, traders cannot identify accurate target prices before entering the trade.

What are the risks of trading a bear flag?

The biggest risk of trading a loose bear flag is a 55 percent chance of the pattern failing. Traders must ensure they identify a better-performing flag pattern with a higher success rate or the trade may fail.

Learn the Success Rates of 65 Chart Patterns The Encyclopedia of Chart Patterns by Tom Bulkowski details the reliability and success rates of 65 chart patterns and shows you how to trade them. It is an indispensable resource for traders and investors looking to increase their profitability by taking advantage of stock chart patterns. This comprehensive reference book contains in-depth explanations and detailed illustrations of more than 65 different patterns, including Head and Shoulders, Double Tops, Wedges, Flags, Gaps, and more.

Encyclopedia of Chart Patterns by Tom Bulkowski
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Barry D. Moore CFTe
With a wealth of experience spanning 25 years in stock investing and trading, Barry D. Moore (CFTe) is an author and Certified Financial Technician (Market Analyst) recognized by the International Federation of Technical Analysts (IFTA). Notably, he has also held executive positions in leading Silicon Valley corporations IBM Corp. and Hewlett Packard Inc.

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