The bear flag pattern is a bearish pattern that the market is most likely going to continue on the downtrend. This pattern manifests on the chart when you have a strong bearish momentum with large range candles and a small pullback with small range candles. This usually means that the bears are in control with little-to-no buying pressure. The large candles are an indicator that the bears can easily push the price lower. The small range candles show that there is some buying pressure, but it is most likely from the traders taking profit from their short positions. This clearly shows that if nothing changes, the market is most likely going to continue on a strong downtrend.
When trading the bear flag pattern, the location matters a lot. For instance, when the market is far from the moving average, you do not want to trade the bear flag because the price will most likely reverse higher. You should use the bear flag pattern as a signal to open a position when the price is near the moving average and when the bear flag pattern appears after a break of support.
Waiting for the bear flag after support has its benefits because:
- The risk-to-reward ratio is more favorable.
- The bulls are not showing any strength so you have a higher probability trade.
- Your stop loss can be set at a logical level, i.e. above the high of the bear flag).
Timing your entries when trading the bear flag
The bear flag chart is considered to be a trend continuation pattern. The trend pattern continues on a downtrend until a new support level is formed. The bear flag usually emerges as a trend consolidation channel, but soon, the price breaks below the support level and the bearish trend continues. For cryptocurrency traders, this is a clear signal for entry so that they can benefit from the downtrend.
To identify the bear flag, you need to point out two key elements, i.e. the pole and the flag. You also need to identify the volume indicator and the breakout. The pole coincides with the initial price decline and it is driven by a strong bearish momentum, and the flag is seen in a form of consolidation channel that comes after the price decline.
When the price is below the flag, i.e. the consolidation channel, then traders can place sell orders. You can use the pole to calculate how far the downtrend will go, but to be on the safer side, the height of the flag can be used to determine your profit channel.
The bear flag shows that an existing downtrend has been oversold and the market needs a rest. This usually means that after a steep price movement, the market will move in the opposite direction for a while, but when the pullback is over the price will continue to move in a downtrend.
Using the bear flag pattern as a signal to open a position requires patience for the bears to break below support. Often the risk involved may pay off in high rewards if the downtrend continues; especially if the bear flag pattern is closer to the moving average.