Bearish Flag on Crypto Charts?
The bear flag chart pattern in cryptocurrency indicates a cryptocurrency asset's ongoing downward trend with sporadic periods of consolidation in between. The market psychology behind a bear flag pattern shows negative momentum and increased selling pressure.
There are three key elements necessary for a bearish flag pattern to occur
- The flagpole - This is the first sign of the bear chart but is in itself not indicative of the pattern. The crypto price must have a steep downtrend.
- Flag - After a brief downward trend, there will be a short consolidation line or support trend. This is known as the flag.
- A breakout - the breakout is the final piece of the bearish flag patterns. The consolidating chart must be broken downwards, below the support level. In case the breakout is upwards, no bear flag pattern is formed.
Chart patterns are a collection of recurrent forms that can be constructed on an asset's chart by linking price highs and lows. These patterns, or "setups," are technical, analytical tools that explain the market psychology of an asset through its price action. In other words, chart patterns are a way for traders to guess the future movement of an asset using information from its past.
There are different chart patterns, each signifying different trends. While Charts alone can be fallible in dictating the next market direction, their results become more predictable when combined with other technical indicators.
What is Bear Flag Pattern
The bear flag pattern is a bearish continuation pattern occurring due to weak or negative factors on an asset’s fundamentals. Most times, it is seen when FUD is driving the price of an asset down. It gets its name from looking like an inverted flag pattern held on a pole.
When Is This Bear Chart Pattern Valid?
- The sentiment shown on the pole must be bearish.
- The flag must retrace upwards with at least two smaller price waves.
- The retracement shouldn’t exceed the 50% Fibonacci level, otherwise, the bearish crypto trend is fragile.
- The subsequent breakout must be with a big bearish candlestick breaking through the channel boundary.
The bear flag trading pattern is a reliable chart that shows how oversold an asset (in this case, cryptocurrency) is. Following the momentary reversal, it denotes the continuation of a downward trend. The retracement is represented by the flag portion of the bear flag pattern. The bear flag pattern, as a whole, is a continuation pattern that aids the bears in driving the market lower.
The Bull Flag Pattern
Unlike the bear flag, this pattern follows a positive or good sign in an asset (crypto) moving it in a bullish direction. This pattern shows how overbought a cryptocurrency is and is characterised by a vertical upward movement with brief consolidation, followed by a more volume-backed move upwards. The initial buying pressure in a bull flag pattern gets many other traders in a frenzy and ‘fear of missing out’ zone.
How Reliable Is the Bear Flag?
While the bear flag pattern is one of the most reliable technical indicators, it isn’t bulletproof. Therefore, It is essential to check for negative signs before making any trades and manage the risk properly. Place your stop loss above resistance so that you can safeguard your capital if the trade goes against you.
Also, to increase the reliability of the trading bear flag pattern, it can be combined with indicators like the RSI.
When Should You Trade the Bear Flag Pattern?
Remember earlier; we explained the three major components of a bearish flag trading pattern. How then do you know the best time to trade the bear chart patterns? The answer is simple. You should enter the trade when the asset has broken down from the consolidation. It is worth noting that the consolidation retracement should not be more than 50% of the initial pole.
Three Things to Note When Trading the Bear Flag Pattern
There might be many false signals depending on how long the consolidation takes. Though more aggressive traders will want to short crypto right below the flag support, the more reasonable entry price is when confirmation of a downward trend has been received. This can vary due to the difference in volatility of various cryptos.
2) Stop loss:
The best place to put the stop loss is right above the resistance of the flag. You should check the upper line of the flag and place your stop loss a little above it.
Your price target should be set using previous support levels. This is better than using the flag pole without the flag to set a target.
The Psychology Behind This Pattern
The bull and the bear flags start with one side of the demand-supply (bulls-bears) caught off guard. For the bear flag pattern, the bulls are caught off guard due to negative sentiments on the cryptocurrency, and they lose out to the bears who charge forward. Overambition sets in, and the bulls come back, causing the consolidation. Over time, the bears regain control of the charts and drive the price down, this time with stronger severity.
Volume Patterns and Bear Flag Patterns
The importance of using Volume patterns with Flag patterns is to offer an extra layer of assurance on the market's direction.
Trades in a bear flag formation will look for high or rising volume on the flagpole. Conversely, the downtrend's increasing or above-normal volume (flagpole) shows that the sell side is becoming more enthusiastic about the in-focus cryptocurrency.
If the optimal volume for the flag denotes a consolidation and gradual reversal of the downtrend, it is low or dropping. This demonstrates a lack of buying zeal for the countertrend rally.
Low volume into the flag and high volume into the flagpole indicate that the market's overall momentum is unfavourable. This strengthens the notion that the previous downward trend is likely to persist.
In contrast to the chart below, which displays low and declining volume levels into the flag consolidation and indicates diminished interest in the steady climb, the chart above highlights high and increasing volume levels into a downtrend, signalling a strong sell-side momentum.
These charts show the favourable volume patterns that traders should attempt to spot before a bear flag, which presupposes further price weakness to come after.
Benefits Of Using The Bear Flag Pattern
The bear flag pattern occurs frequently when analyzing charts to depict demand and supply.
Some of the advantages include;
- The pattern can be seen on any timeframe on crypto charts.
- It works well for both day traders and swing traders.
- This pattern is one of the few patterns that show traders where to open a position, what profit to expect, and where the stop loss should be.
- There is an excellent risk-reward system while trading cryptocurrencies with this pattern.
Risks Of Using The Bear Flag Pattern
Just as the bear flag pattern has advantages in crypto, it also has some demerits. Some of them include
- Although, in theory, it is easy to spot the bear flag pattern, while trading live, it might prove difficult to spot it. The often high volatility that comes with the cryptocurrency market also makes the strategy fallible.
2. The premise of the bear flag pattern is that the retracement will not be more than 50% of the pole. What if it is? Well, the bear flag pattern would not be effective here.
Trading professionals must consider the accompanying volumes and other technical indicators when using this chart pattern. By measuring the volume and RSI, you may assess the pattern's strength and subsequent momentum. Trading choices are made more confidently when traders use volume as a reference.
Your chances of making money in the cryptocurrency market increase if you can use price charts, evaluate the market conditions and make timely decisions. If you are new to charts, you will save a lot of money and gain experience by using demo accounts. This will help you get familiar with different charts and experiment with the rules.
- When is the best time to trade this pattern?
After the channel has shown repeated lower highs and lower lows. Again, the Fibonacci levels come in handy here.
2. What timeframe is best suited for this pattern?
It can be tempting to trade the bear flag pattern on short timeframes, but the best results are gotten over longer timeframes. The volatility of the crypto market means any news can have more effect on shorter timeframes.
*This communication is intended as strictly informational, and nothing herein constitutes an offer or a recommendation to buy, sell, or retain any specific product, security or investment, or to utilise or refrain from utilising any particular service. The use of the products and services referred to herein may be subject to certain limitations in specific jurisdictions. This communication does not constitute and shall under no circumstances be deemed to constitute investment advice. This communication is not intended to constitute a public offering of securities within the meaning of any applicable legislation.