“Bear Flags” usually occur as markets fall from a base and pause in a downtrend. They are almost identical to “Bull flags,” but in the opposite direction. “Bear flags” can be easily spotted as they make “higher highs” and “higher lows” within the “flag” area. The trend lines connecting “highs” and “lows” are almost parallel. A clear breakdown confirmation is needed to trade these patterns as the price continues in the same direction prior to the “flag” formation. Like “Bull flags,” “Bear flags” are also very reliable.
Trade: After a series of “higher high” tops and “higher low” bottoms, prices will breakout of the lower-trend line. Wait for confirmation of breakdown with a long range bar. One of the best confirmations occur when prices “close” below a previous “swing low” (of bear flag). Enter a “short” trade one tick below the “swing low” or previous bars low.
Target: A typical target in “Bear flags” is from 76% to 100% of the AB range prior to the “Bear flag”. The secondary targets are from 138% to 162% of the range AB.
Stop: Place a “stop” order above C to protect the “short” trade.
Trading A Bear Flag
Trading A Bear Flag Pattern
The example above illustrates a “Bear flag” formation from the Nasdaq Emini futures (NQ) daily chart. In March 2005, NQ made a swing high (A) and by late March 2005, NQ prices sold-off to 1580 level. A retracement of 38% into the AB swing (at C) formed a “Bear flag”. A breakdown bar (in the prior down trend direction) below the trendline (at C) gave a short trading opportunity.
- Enter a “short” trade below the low of the breakdown bar (at 1580).
- A “stop” order was placed above the “high of the top trend line (swing high).
- Targets were set at 70% to 100% of the AB range prior the “Bear Flag” from C.