Learn more about the Bear Flag Pattern and find out how effective it is.
The Bear Flag Pattern is one of the most well-known visual chart patterns, but it gets a bit of criticism in many articles for being inaccurate. The Bear Flag Pattern is relatively easy to spot, but thankfully there are indicators that can spot out the pattern. The other benefit of an indicator detecting the pattern is that it makes it much easier to code an algorithm for the purposes of both backtesting and even potential use in live trading. This is an opportunity to understand this not-well-loved chart pattern (the wedges are appreciated even less) and get an actual backtest to determine its effectiveness.
What is the Bear Flag Pattern?
The Bear Flag Pattern is supposed to be a bearish continuation pattern, which means that if the market is moving downward, a bear flag would indicate that there is more bearish activity to come. Naturally, it is an opportunity for traders to short a currency pair, CFD, commodity or any other type of traded instrument.
What does the Bear Flag look like when it is actually on a chart?
The problem with the Bear Flag is a matter of defining what it looks like as there are disagreements. These disagreements involve the following issues:
- How many periods does a Bear Flag include?
- How high can a Bear Flag retrace after a downward movement?
- Do wicks matter in terms of determining the trendlines?
- How much of a bearish movement prior to the Bear Flag deserves consideration?
It's a pattern and there are no rules set in stone. It's rather subjective and there is no truly definitive answer.
A bear flag simply has these characteristics:
- A sudden downward movement to precede the flag.
- A slight upward movement across X amount of candles.
- The price falls below the low trendline formed connecting the lows.
Backtesting the Bear Flag Pattern with an Indicator
The testing conditions will involve this pattern being used with different timeframes used and different currency pairs. All positions will be short positions.
Timeframes Used: 1 Hour, 4 Hour
Currency Pairs Used: EURUSD, USDJPY, AUDUSD
Take Profit: The difference in pips between the Flag's High and Low Point.
Stop Loss Criteria: Flag high
Time Period Tested: July 1, 2016 through June 30, 2018
Bear Flag Pattern Backtests
4 Hour Chart – EURUSD
1 Hour Chart – EURUSD
4 Hour Chart – USDJPY
1 Hour Chart – USDJPY
4 Hour Chart – AUDUSD
1 Hour Chart – AUDUSD
Overall Takeaways on the Bear Flag Pattern
This is not a strong chart pattern for generating positive returns on a 1 Hour or 4 Hour Chart. The Bear Flag may benefit from a filter of some sort for trades, but it is not going to result in profits on its own when used as it is intended. The Bear Flag over the course of two years does not appear much for any one particular currency, which means that a strategy would have to trade multiple currencies at once to get enough trades.
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