Learn more about the Bull Flag Pattern and find out how effective it is.
The Bull 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 Bull 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 Bull Flag Pattern?
The Bull Flag Pattern is supposed to be a bullish continuation pattern, which means that if the market is moving upward, a bull flag would indicate that there is more bullish activity to come. Naturally, it is an opportunity for traders to long a currency pair, CFD, commodity or any other type of traded instrument.
What does the Bull Flag look like when it is actually on a chart?
The problem with the Bull 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 Bull Flag include?
- How low can a Bull Flag retrace after an upward movement?
- Do wicks matter in terms of determining the trendlines?
- How much of a bullish movement prior to the Bull 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 bull flag simply has these characteristics:
- A sudden upward movement to precede the flag.
- A slight downward movement across X amount of candles.
- The price rises above the high trendline formed connecting the highs.
Backtesting the Bull 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 long 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 low
Time Period Tested: July 1, 2016 through June 30, 2018
Bull 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 Bull Flag Pattern
The results are mixed for the Bull Flag Pattern and the percentage of profitable trades on a 1 Hour Chart may be intriguing for a strategy would have to trade multiple currencies at once to increase the number of trades beyond 20-30 trades over a span of two years. Adding a filter to this pattern while still trading 8-12 currencies with it may yield fruit for a trader, but it is advised that the filter not set up a curve-fitting sort of a scenario. Further backtesting is crucial, but on a 1 Hour Chart there is potential in a test of three different currency pairs. No Holy Grail has been created here, but there is an opportunity for something good to be created.
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