Bear Flag Patterns Explained: What They Are & How To Trade Them

Bear flag patterns are fairly common, well-known, and reliable.

Chart patterns are one of the most popular forms of technical analysis.  That’s unsurprising, considering how easy they are to understand and trade.  Not to mention, they work with virtually all tradable assets.

In this Bearish Flag Pattern Trading Guide, we’ll dive DEEP on:

• How They Work
• What They Mean
• Components & Criteria
• Where They Fit
• Their Psychology
• How To Chart Them
• How to Trade Them
• Similar Chart Patterns

First, let’s start with the basics.

What Is a Bear Flag Chart Pattern?

A bear flag is a bearish chart pattern that consists of a rapid drop followed by a bounce enclosed within an ascending channel.  Price falls significantly then consolidates between two rising parallel trend lines.  It is most commonly used as a bearish continuation signal.

Naturally, the bear flag is similar to other flag patterns (and is the opposite of the bull flag).  It also has overlap with the bearish wedge, bearish pennant, and ascending triangle.  And by default, it contains an ascending channel, which is a type of rectangle pattern.

As with all chart patterns, they are more a suggestion than promise.  You should never look at them as guarantees!

However, they can still help you make money if you know how they work.

How Bear Flags Work

Bearish flags arise due to a common scenario.

They begin when price falls to a dramatic new swing low.

It rebounds shortly thereafter, and eventually rises to form a much lower lower-high.  It falls again, but this time, not quite as low as the previous time.  The next time it rises, it sets a higher swing high than the one before it.

This happens repeatedly, in such a way that you can draw an ascending resistance line along the peaks and a parallel support line along the valleys.  Together, these make the flag itself, which is said to be attached to a “flagpole,” the original dropdown.

Any candle close outside the pattern sets up a breakout trade in that direction.  Bearish ones are seen as the main trading opportunity.

You can trade bearish flags in stocks, forex, cryptocurrency, and most other markets.  They appear across a variety of time frames.  And they are very easy to see on the chart.  No wonder beginner traders are so attracted to them.

This begs the question, then, what do they actually mean?

What Bear Flags Mean

Bear flags represent a period of distribution.

In other words, bulls get a little relief as bears take profits.  A minor uptrend develops in a shallow channel but nothing to challenge the greater downtrend…yet.  Some sellers are content to wait for more buyers to fall into the bull trap.  Others know they need to keep the pressure on.

If the bears are able to generate enough selling pressure, they can ensure the relief rally becomes a dead cat bounce.

As the bear flag pattern continues, volatility contracts and price consolidates.  But that won’t last forever.  Eventually, all that pent-up energy will have to be released.

Bear flags form during downtrends most often.  When they do, they tend to signal continuation.  On rare occasions, they may form during uptrends, signaling reversal (and perhaps even help create longer-term tops).

They are a classic bearish chart pattern, after all.

In this way, successful bear flag patterns imply a bearish bias but do not seal a bearish outcome.  They show demand pushing back weakly against supply after a large sell-off.  More often than not, they play out as distribution patterns, with bears able to drive price lower.

Before you can identify bear flags, however, you need to understand their makeup.

So let’s take a look at how they are made.

Bear Flag Pattern Components & Criteria

Bear flags have several parts.

Some remain static (or at least should remain static) throughout the pattern.  Others develop as price changes over time.

Most components have specific criteria.  Some of these are seen as guidelines.  However, several of them are absolutely mandatory.  If these conditions are not met, then the bearish flag is invalid.  It loses all supposed predictive power.  The price targets should be disregarded.  The trend lines are then the only things that may still hold some weight.

Therefore, it is crucial you make sure all the pieces are in the proper place.

Flagpole

This is the big drop that kicks things off.  It should be a dramatic, near-vertical fall, similar to the first side of a v bottom pattern (see image below).  This must happen within only a handful of candles.  The flagpole’s height sets the overall tone for the pattern.  It also sets a limit on how far the flag is allowed to rise before the pattern becomes invalid.

Criteria: The flagpole must represent a significant, rapid fall in price.  This whipsaw must remain at last twice the height of the flag as the pattern develops.

Flag

The flag itself is a short ascending channel.  It will contain a short term uptrend, with highs and lows that become insignificant on higher timeframes.  However, as this channel retraces the flagpole, it gives the bulls more cushion to score a higher low in the event of a breakdown.  It could also trigger the bear flag’s 50% flagpole rule.  If the top of the channel exceeds the halfway mark of the flagpole, the flag is invalidated.  In short, the flag’s slope determines how quickly the clock is ticking.

Criteria: The flag must be an ascending channel no taller than half the height of the flagpole.

Price Target

The most common bear flag price target you’ll see comes from subtracting the flagpole’s height from the breakdown point.  However, this method often yields very aggressive price targets, nearly doubling the losses of the initial sell-off.  More reasonable targets can be found using the thickness or total height of the flag channel for the measured move.  Very conservative traders may even target an exit at the bottom of the flagpole.

Internal Price Swings

As flags develop, price oscillates between support and resistance.  Not every swing will make it to one of the two main trend lines.  But patterns with a lot of empty space are seen as less reliable.  In this way, ranging price action adds validity. These shorter-term trends also open the door for swing trades, though flags tend to allow less time for these than most other chart patterns.

Criteria: Internal price swings should fill the flag in an approximate sawtooth pattern.

Trend Line Tests

Each test of support or resistance is a bit of a battleground.  Sure, these tests are important for pattern validity.  However, each is a potential breaking point, with progressively higher stakes as the pattern matures.  Scalp traders may celebrate the volatility spikes.  But others look on with baited breath.

Criteria: The channel’s support and resistance lines must be tested at least five times in total.  More successful tests are generally seen as an omen of higher reliability.

Fakeouts

The true breakout is often preceded by one or more false breakouts, or fakeouts.  These fleeting moves burst through one of the trend lines then trade back inside them shortly thereafter.  Fakeouts may shatter the structure and invalidate the pattern completely.  Or, they may only require a bit of redrawing or zooming out.  They could be an omen of things to come.  Or, they could be the byproduct of a stop hunt.

Breakout & Breakout Point

The breakout is the reason everyone comes to the party in the first place.  It’s where the fun truly begins.  If the price breaks down, we call the bear flag successful.  If it breaks up, we call it a failure.  From this point, it stays above or below the flag formation for good.  All that’s left is to see how far it goes.

Criteria: The breakout must close outside the pattern and stay outside the pattern.  At the very least, it cannot close above the original support line.

Pullback (& Retest)

Pullbacks after the breakout are the norm, but not an inevitability.  They can be deep or shallow, immediate or delayed.  Full retests of the breakout line are common, but not guaranteed.  Most patterns perform better without them.  This is true of both upside and downside breakouts.

Criteria: The pullback must not close above the support-turned-resistance line.  If it does, it invalidates the breakout.

Trading Volume

Volume is one of the most cited chart pattern validation and confirmation factors.  Traders expect decreasing volume during consolidation and increasing volume during the breakout.  However, many miss the fact that bearish consolidation (and bearish price action in general) often happens alongside elevated volume.  Therefore, bear flags do not carry the same expectation of a contracting volume profile as their bull flag counterparts.  Instead, volume often remains somewhat inflated before spiking again on the breakout.

Criteria: Trading volume should spike alongside the breakout.  Ideally, the spike would be significant and remain high until the target is met.

Where Ascending Triangles Fit in the Chart Narrative

The markets are often characterized as a battle between the bulls and the bears.

It’s like the charts have a story to tell.

Patterns are a natural progression from market cycles, trends, and price levels.  They also build on the data from candlesticks and candlestick patterns (even though you can usually see them on a line chart).

However, chart patterns have an even larger impact on the chart narrative.

That’s partly because they tend to span longer periods of time and therefore carry more weight.  This is especially true of the most iconic patterns like the bear flag.  Since they are so well-known, there are often many parties itching to join the fray.

This frequently foreshadows dramatic pieces of price action.

Bear Flag Market Psychology

The ascending triangle is a visualization of the psychology of the market.

It illustrates a devastating blow delivered by the bears followed by a weak counterstrike attempt by the bulls.

Imagine this scenario:

You can picture this scenario anytime you see price form a short ascending channel after a large sell-off.  It could apply to any tradeable asset.  However, no two flags will have exactly the same story.  Nor will they play out in exactly the same way.  But true traders consider what both sides are thinking.

The frequency and performance of bear flags varies across markets.  So study their historical performance on your preferred asset(s) and time frames specifically.

How To Chart Bear Flag Patterns

Before you can analyze bear flags, you need to be able to chart them.

Luckily, all you really need is basic chart markup skills.

TradingView has a parallel channel tool and even a bear flag tool if you need them.  But they are easy to highlight with trend lines and/or extended trend lines.  That’s what you’ll see most traders use.  They are more than adequate to map out all the important levels and decision zones.

Then, analyze the ascending triangle pattern with your favorite trading indicators and tools.

You may need to adjust or redraw your lines several times.  When you’re new, it can be a bit like trying to read tea leaves.  Sometimes, a flag might fail but its rising channel continues on.  Or, a series of temporary breakouts could evolve it into a broadening wedge.

That’s why each pattern’s criteria is so important.

Like all technical analysis tools, chart patterns are just a framework for understanding price action.

You’ll need more in your arsenal to consistently make money with them.

How To Trade Bear Flag Patterns

The basic concept for trading bear flags is very easy to understand.

As with all flag patterns, you can get in on a breakout trade on either side of the formation.

The conventional bearish trade is:

1. Step 1: Take a short trade if/when the price closes below the rising support line.
2. Step 2: Place your stop loss just above the breakdown point.
3. Step 3: Set your profit target by subtracting the flagpole’s height from the breakdown point.

The conventional bullish trade is:

1. Step 1: Take a long trade if/when the price closes above the rising resistance line.
2. Step 2: Place your stop loss just below the breakout point.
3. Step 3: Set your primary profit target by adding the flagpole’s height to the breakout point (or using your preferred rule).

Bear flags are slightly harder to trade than some candlestick patterns due to their rapid resolution speed.  This gives you a comparatively short trading window.  Still, the clarity of its rules make for a very tradeable pattern.

Plus, there are many things you can do to optimize its use.

Still, you probably shouldn’t aspire to be a “pattern trader.”  Learning to use patterns is a great place to start.  But you’ll eventually want (or need) to move on to more sophisticated strategies.  These may use patterns, but not as the centerpiece.  Luckily, traditional chart patterns are easy to integrate into many different trading styles.

A reliable trading strategy requires a dependable edge and calculated risk management.  Learn trading math and order types well.  Add some options and/or automation if you really want to cook.

However you choose to do your bearish flag trading, keep your rules strict.

Signals mean nothing without proper trade execution.

Step 1: Where & How To Enter Bear Flag Trades

By now, you should understand the basic entry.

You have multiple options to play the breakout straight.

You could watch the pattern and place a market order on the candle after the breakout.  Or, you could forgo the candle watching by implementing price and/or volume alerts.  You could even place a stop limit to buy the breakout automatically (though that does have its own risks).

Yet there is more you can do to get the best entry possible.

Early Entries

The most logical way to increase your gains is to buy tests of the upper trend line before the breakout.  The taller the channel, the larger the profit potential percentage increase.  Getting in early may also enable a post-breakout break-even stop loss along the bottom of the channel.  While it does open you up to more risk, it may be worth it.  For most rising patterns, this is a no-no.  But the bear flag’s short breakout clock does make it a viable option for experienced traders.  Just don’t get stuck in your position!

Leave It Late

Unlike some patterns (ie. ascending triangles), early entries may lead to a worse position than waiting for the breakout.  Not only does leaving it late present a better risk/reward ratio, it directly increases your potential gains on short trades.  As price rises higher, prospective percentages of downward moves increase.  On the flip side, bear flag breakouts are often as sharp as the original flagpole.  Thus, there’s a chance you could miss the move if you try to leave it too late.

Considered Confirmation

Where you assign confirmation can make a big difference to your risk/reward ratio.  Volume, higher-term candle closes, candlestick patterns, and indicator signals are all legitimate options.  Some traders may even wait to enter on a channel retest (though this may not be as effective as it is with other types of patterns).  Ideally, you’d back up your own choice with historical analysis.

Playing the “Fail”

Bear flags that break upward are almost as easy to trade as successful ones.  Assign the measured move to the top of the breakout, and you have your primary bullish price target.  If price hits this target, it will be higher than the original breakdown level, all but clinching a reversal.  However, it will have to contend with strong overhead resistance by default.  This notwithstanding, failed bear flags may have as much long-term potential as successful ones.

Step 2: Where & How To Exit Bear Flag Trades

The bear flag is one of the most well-known chart patterns.

This often leads to increased trading activity.

Its primary price target is also well-known.  This often leads to unpredictable price action.  When so many traders are looking at the same levels, price action has a tendency to make everyone look like a fool.  Don’t be surprised by either underperformance or overperformance.

Know your gameplan, including your exit(s), going into every trade.

Frontrunning

Underlying support may stall price, or prevent it from reaching the target altogether.  Make note of prior levels, important moving averages, and other potential obstacles.  Conservative bears may take profits here.  Aggressive bulls may look for longs.  Both of these exert pressure against the breakout.  In response, you could consider locking in some or all your gains here too.  Identify these levels and establish your contingency plans in advance.

Staying Exposed

If you’re more patient, you can opt to stay in the trade, giving price more time to reach the target.  After all, if the target on either side gets met, the greater trend will likely follow.  By using a trailing stop loss, you may be able to stay exposed in a risk-free trade.  This is how flags can lay the foundations of longer-term positions.  But again, they often have dramatic breakdowns with large bounces once they find support or run out of momentum.  Sometimes, you’ll be far better off getting out.

Breaking It Up

You could also do all of the above by deploying different chunks of capital in different ways.  For example, you might set three different profit targets and try to sell a third of your position at each.  Just be careful with this approach.  It can make it hard to keep your P&L in perspective.  You’ll also need to adjust your position management as the trade unfolds.  So don’t use this strategy just for the sake of it or out of indecisiveness.  Make sure each of your targets are well-reasoned, backed by the math and asset’s history.

Step 3: Where & How To Stop-Loss Bear Flag Trades

You also have options when it comes to stop-losses.

The initial stop loss is typically placed in one of three locations.  First, you can place it on the other side of the newly broken trend line.  Second, you can place it on the other side of the last swing high or low.  Third, you can place it on the other side of the flag channel.  (The last two may or may not be the same level.)

It partly comes down to your risk tolerance.  Tighter stops lower potential losses.  But they can also lead to premature exits.

Whatever you do, just don’t freewheel it.

Get in the habit.

Set.  Stops.  Always.

(Even if they are loose.)

Moreover, how you use them should match your overall strategy.

Trailing Stop Loss

Some traders prefer trailing stop losses.  This more passive technique allows you to lock in unrealized gains without exiting.  Instead of cashing out, shadow the trend with your stop loss.  Lesser pullbacks, moving averages, Fibonacci extension levels, and other minor levels are all options.  If you’re well in the money or trading long-term, you could even go with a fixed percentage.  It is such a common practice that some trading platforms and tools allow you to automate it.  Sure, it can make you susceptible to stop hunts.  But that’s better than losing money.

Break Even Stop Loss

Break-even stop losses are meant to do one thing.  They prevent you from taking an L from a winning position, which is one of the worst feelings in trading.  As soon as it is appropriate, move your stop loss down to a level that ensures you can’t lose money.  You’ll be able to do it earlier if you bought the top of the flag’s upper resistance line.  Otherwise, you may have to wait until some sort of post-breakout support or resistance.  This strategy is a great way for newer traders to keep confidence high.  It can also protect you from false breakouts.

Other Chart Pattern Types

The bear flag pattern operates in the same way as many others.

It has similar rules to channels as well as other patterns that include flagpoles.  As a consolidation pattern and bearish chart pattern, it is also a distribution pattern.  Additionally, it shares traits with most other chart continuation patterns.

It is a good idea to study more of these patterns and their relationships.

The vast majority of them are worth learning about.

• Adam and Eve Patterns
• Ascending Triangle Patterns
• Cup and Handle Patterns
• Descending Triangle Patterns
• Descending Wedge Patterns
• Double Bottom Patterns
• Double Top Patterns
• Head and Shoulders Patterns
• Rising Wedge Patterns
• V Bottom Patterns
• W Patterns

At the very least, you should do a deep dive on the most popular and common ones.  Then, skim the rest of the list if you must.  You don’t have to commit every single one to memory.

However, learning about different chart patterns has big advantages.  It will help you find more trading opportunities.  Perhaps more important, it will expose you to many proven trading ideas.  More important still, it will teach you a lot about price action, market psychology, and more.

In the end, how patterns help elucidate the story in the charts is even more useful than the signals they provide.

True traders always consider contingencies for whatever the market brings anyway.

Takeaways

To review:

The bear flag is a bearish distribution pattern.

• It is characterized by rising support and resistance following a large price decrease.
• It gives a bearish bias and acts as a continuation signal most often.
• The standard trade is a breakout trade below the support line or above the resistance line.
• Bear flag patterns are common and well-known but easy to miss due to their brief time-until-resolution.
• They are fairly easy to incorporate into many types of trading strategies and perform well.
• They are especially popular among new traders, breakout traders, and pattern traders.

Like all chart patterns, bear flags don’t guarantee anything.  However, they do hint at upcoming possibilities.  They also come with a proven trading framework.  What’s more, you can study more patterns to find even more opportunities.

Pattern analysis may not be a silver bullet, but it is a useful weapon in your trading arsenal.

Have questions or more information to add?  Contribute to the conversation in the comments below!  Or, if you know someone who could benefit from this post, share it with them.  You can also check out our Chart Patterns Guide to improve your chart analysis skills.