Markets are at all-time highs and concerns about an upcoming recession have faded. This could mean only one thing — fear of missing out (FOMO) is kicking into HIGH GEAR.
If you were one of those traders who were waiting for a pullback to enter and saw the markets move higher without you, don’t worry.
You may have missed out on a little bit of short-term fun, but there is another party just around the corner.
It all has to do with one little known strategy that I want to share with you today — the Bull Flag Pennant.
Let’s dive in.
It looks a lot like how it sounds — like a flag!
Here is a simple drawing of what you want to look for:
Calm down, Killer. Don’t worry about how to trade it, or where to place a stop loss just yet. We will cover that shortly…
A Bull Flag, by definition, is a period of consolidation followed by a breakout that pushes prices higher. This breakout creates the well defined “Flag Pole,” as momentum buyers push the price higher.
Once profit-taking begins, the “Flag” will start to form. In this area of the chart, prices are moving sideways to lower in a zig-zag pattern as buyers and sellers face off in a brutal matchup, hoping to drive prices in their favored direction. This sideways channel is referred to by traders as consolidation.
Pro Tip: In strong trending markets, it’s easier to buy breakouts than waiting for pullbacks.
So how do you trade this breakout?
Let’s uncover some of the tricks that we can use to identify potentially significant movement.
How to Spot the Bull Flag
So we know that a Bull Flag breakout is a signal of strength. When there is a slight pullback or consolidation at or near highs, it’s a signal that the market is trending.
Here is the SPY as an example of what to look for (highlighted with blue):
Similar to the sample image, you can identify the infamous Bull Flag almost immediately.
Sellers stepped in near the top of the flagpole causing sideways price action and consolidation near all-time highs.
When to Enter a Bull Flag Trade
There are 3 key components to getting set up for a Bull Flag trade:
- Identify stocks that have made a strong mover higher (forming the flagpole)
- Identify consolidation at or near the highs of the pole. Here’s a tip: Consolidation is best found at key resistance levels, i.e. 52-week highs
- Trade the break of the highs or top of consolidation pattern with high volume, typically the top of the flag.
Now let’s talk about our exit strategy.
When To Exit a Bull Flag Trade – Stops and Targets
Great, so now we have identified the Bull Flag Pattern and where to place our entries. Now we have to decide where to place stops and look for target exits.
Luckily for us, the KISS (Keep It Simple Silly) rule works here.
To start off, all Bull Flags come as “All Inclusive” packages… meaning they all have an entry, stop loss, and profit levels built right in!
Let’s talk about stops first.
A rule of thumb that I go by is to place a stop right under a low made during the consolidation in the flag. If price trades lower than this level, the Bull Flag is invalidated and will likely continue lower signaling time to get out.
Next — the real fun part — let’s decide where to take profits.
So there is this thing called a “measured move” and it’s built into every Bull Flag as well…
Don’t worry, it’s easy to find and doesn’t require dreaded trigonometry either.
Just take the high of the flagpole minus the low of flagpole to give you the expected move after a breakout.
Once found, simply place sell orders at or near those calculated levels and watch your trade unfold.
As you can see in this example, the Flagpole measured $10 in height, giving us an expected target of $10 above the break above the flag.
Let’s Recap Quickly
Here are the key points we have learned about trading a Bull Flag pattern:
- The Bull Flag Pattern is a bullish continuation chart pattern. The trend is your friend here.
- Optimal times to trade the Bull Flag Pattern is just after the market break out, during a strong trending market, or when it’s near Support/Resistance. This is exactly what unfolded in the SPY chart above.
- You can enter your trade with a buy order above the high of the flag. If you are more conservative, just wait for a close above the highs instead.
- Place all stop orders below the lows of the flag to prevent a failed pattern.
- Place all target exit orders near the measured move from the flagpole.
This is just one of the many setups I keep stashed away in my trader’s toolbox. If you want to learn more about how I trade the SPY day in and day out just CLICK HERE.