Bitcoin bull flag trading pattern; Recognition and buy setup

Today, I will be covering a continuation trading pattern called a flag. Flag can be bullish and bearish. I will cover only bullish patterns, it works just as well for bear flags as well. Concept explained and history of this pattern will be covered at the end.

What is a flag?

The pattern is exactly how it sounds; it looks like a flag waving. The pole part of the flag is the fast price rise and the flag itself is the consolidation period. (Look at my chart for reference). A bull flag is a continuation pattern where the price stalls and consolidates briefly before continuing to rise further.

 

Characteristics of a bull flag pattern:

  1. Prior to a flag pattern, the price of bitcoin(or stock) must be going up, in an uptrend. How do you define an uptrend?(Read concept explained section below).
  2. Fast rise in price forms the pole of the flag. 
  3. Price stalls at this high price, the price volatility drops at this point. This is called consolidation or the flag itself. Volume is usually lower than average.
  4. With step 1, 2, and 3, we call this a flag. A confirmed flag happens when the price continue to rise above the consolidation area and breakout above, making new high
     

How to trade bullflag:

It is one thing to understand the pattern, it is another to trade it. Many technical analysis books such as John Murphy’s or Charles D’s teach you this. But that is NOT good enough. As a trader, information is only good if you can take advantage of it. Recognizing a chart pattern is the information, now act on it.

Trade style 1, Buy on a breakout confirmation:

When you recognize this pattern in an uptrend, be patient. You only buy if it makes new high; IE breakout of the flag. You can put a stop just below the flag low or fifty percent of the flag low depending on your risk. I do not talk about exits here because it depends on a lot of things. By request, I can do one in a later post.

Statistics based on stock performance by Bulkowski, daily chart:

Average rise: 23%
Percentage meeting price target for meeting breakout: 64%

Trade style2, Buy inside the flag (for highly aggressive traders):

The reason why I say this is highly aggressive is because the price could reverse during consolidation, it doesn’t have to make new high. However, since the price action is in an uptrend, the chance of it going up is higher than going down. In addition, since you buy it at a cheaper price compared to if you bought in Trade Style 1, your risk to reward ratio is better. The stop for style 2 is just below the low of the flag, you risk less since your entry price and your stop loss is very close.

Conclusion

Bull flag is a continuation pattern. You can recognize it by fast price rise with a long consolidation period. The flag is confirmed if it makes new high above the high of the consolidation. You can either buy at this point or more aggressively, buy during the consolidation. The stop is set just below the low of the flag. Of course, this is totally up to you. With a stop below the flag, you have a well defend risk; how much you are willing to lose before you buy.

Did you learn something from this article? If so, you got more learning to do pedawan. Now buy this expensive product of mine that guarantees 1000% return in a month. Hahaha! This blog will be free. So come back, I write an article every few days. Follow me on twitter @ibankbitcoins. I am working on an email subscription.

My next topic will either be:

-Volatility of bitcoins, how does it compare a real commodity?
-A simple moving average trading system. A demo.

Let me know what you want to see in the comments

History of a bull flag pattern:

Since we are talking about history, we gotta spice things up a little yo. If you are still not interested even with ghetto talk, skip this section. Let’s begin.

One of the most badass mofos in the trading world is called Jesse Livermore, the mother effing god like trader from the early 1990s. Compare him to figures like the Rockefeller of the railroad business or Bill Gates of the Silicon Valley. How badass was he? He made millions shorting stocks during the great depression (dollars were worth in gold back then).  J.P. Morgan personally had to tell this guy to stop shorting the market depressed prices. YES J.P. Morgan, the guy whois name is the title of the largest bank in MURICA, J.P.Morgan Chase.

Mr. trader god used his mojo buying up stocks like nobody’s business. When I say his mojo, I actually mean he observed stocks in consolidated patterns (flag). When the price breaks out of the consolidated area, he buys. If he was right and making bling, he buys more at even higher prices. He is essentially doubling up because he is now more confident that the price will continue to rise.

Concepts Explained:

How is an uptrend defined?

The answer to this question is a subjective one. Almost everyone will give you a different answer depending on the style of trading and time-frame. An institutional investor will tell you that the price must be above the 200 day average.  A trader tells you that a 20 day moving average is good enough. A bitcoin trader might tell you that price need to make 5 days of consecutive high. Maybe you just care what I use. I use a simple moving average. Maybe with enough interest, I will do a trading system with defined uptrend.