And The Best Pattern For New Traders Is…
Starting out as a new trader with all the technical indicators and chart patterns available can be a daunting experience. There are so many options to choose from and so many approaches to take that it is difficult to even know where to start.
As a new trader the most important thing is to be able to gain valuable hands-on trading experience, where you understand what is happening and can learn from your mistakes. That is why the best chart pattern for a new trader to use is the bull flag pattern.
This chart pattern is simple and common, so a new trader will get plenty of experience in making trades using this pattern and will gain valuable insight into the application of technical indicators and chart patterns onto the real world of live markets.
What Is a Bull Flag Pattern?
A bull flag pattern is a momentum chart pattern that occurs during a strong bullish uptrend. This chart pattern indicates that there is substantial buying interest, and that this interest is likely to persist into a subsequent strong increase in the price of a stock.
Bull Flag Formation
The bull flag pattern gets its name from a strong vertical uptrend (the pole) followed by a period of low variance consolidation (the flag). Of course, this flag pattern is bullish because it is an uptrend, but the same basic principle applies in reverse for a bear flag pattern.
The initial surge upward of the pole demonstrates the strong initial interest in the stock. However, it is the subsequent consolidation period in the flag area of the pattern that is most important.
This area of the pattern indicates that the stock is able to maintain its price increase despite a period of profit-taking. This period of price stable consolidation suggests that once this period is over, the uptrend will continue with a further sharp increase in price.
Trading a Bull Flag Pattern
The key to trading a bull flag pattern is to take a position when prices start to break out of the flag pattern, and then take profit once the subsequent spike higher occurs.
The consolidation period in the flag area should involve some small price variation as profit-taking occurs and volume should be lighter than when the stock made the first initial run up. Then when prices start to break out of the flag, volume should start to pick up again confirming buyers interest.
Stop orders for this trade should be placed under the pivot of the pullback in the flag pattern itself. If the price drops below this level then the bull flag pattern has been broken and will likely not follow through.
There a couple of different ways to manage this trade. You can look to add to your position as it pushes through highs or you can look to start taking profits at this area depending on your risk tolerance. If you added through highs then it is a good idea to start putting sell order out just above to capitalize on a push up.
The subsequent price surge beyond the flag area is unlikely to exceed the size of the initial pole, and the likelihood of a sharp reversal will increase dramatically after the second sharp movement higher in price. Ideally you want to be in on the first or second flag pattern and if a third one shows up you need to be more careful because they tend to fail more often.
The bull flag pattern is great for new traders. It is easy to identify on charts and it easy to know where to place your stops and take profits. If you haven’t already tried trading bull flags then you should really look into it because they can be very profitable if traded correctly.