Trading the bull flag pattern is pretty simple and straightforward. The availability of scanners makes it fairly easy to pinpoint upward trending stocks, so all you have to do in most cases is wait for them to consolidate at the top position.
Bull Flag Pattern Indicators
There are a few indicators to keep an eye on when on the lookout for bull flag patterns:
- Stocks that increase at high relative volumes mostly spurred on by news events
- Stock prices that remain at highs or near high
In general, it is best to move when prices break out on high volumes or above consolidation patterns. You should also place stop orders at the point just below the consolidation pattern’s bottom.
The optimum risk-reward ratio for profit should be about 2:1. If you initially risk $0.25, your first PT should be $0.50.
Volume Is the Biggest Indicator
The most important indicator of a bull flag pattern is volume. In most cases, this indicates impending major moves and suggests a strong possibility of a successful breakout.
Also, look out for defined descending trends. These trends usually indicate the next point of breakout, which is represented as the topmost segment of the flag in the bull flag pattern.
Know Your Exit Strategies
Bull flags can be quite effective tools for trading if they are used correctly. Nevertheless, it is important to have an exit strategy if you realize that your trading route isn’t viable and you have to consider other options.
There are two possible options in such scenarios. One is to place a stop order just below the consolidation area. This is a fairly common strategy when traders decide to accept their losses and to move on to other options.
Alternatively, you may opt to use the 20-day moving average as a stop. If you go for this course, it will be necessary to close out your position if the stock’s price closes below the moving average.
Use a Different Approach
When small-cap momentum stocks have faster gains than other small-cap stocks, this is a strong indication of a profitable trading opportunity. Also, keep in mind that as mentioned before, the news greatly impacts small cap stocks and initial public offering stocks, also known as IPOs. It’s important to stay up to date on the latest news as a way to benefit from trends and similar events.