What Is A Bear Flag Pattern in The Forex Market?

A bear flag is a common price action pattern that emerges in any market that is trending downward and naturally needs to pull back in order to continue pushing lower. Typically in a bearish market where there are impulsive moves to the downside, we’ll see price pull back in order to generate more liquidity before continuing to push lower. As a result, this correction in price creates a consolidation in the market that looks much like a flag.

The 3 Parts of Bear Flag Pattern

Bear flag patterns comprise an impulsive leg, a correction, and another impulsive leg breaking out of the flag formation (consolidation).

If we break the pattern down into 3 basic parts they are as follows:

  1. Initial Bearish Impulsive Leg
  2. Bear Flag Correction (Consolidation)
  3. Impulsive Leg (Bearish Breakout)

This pattern can be found on any timeframe ranging from the Daily to 4-hour timeframe, or as low as the 1-minute timeframe. 

How A Retail Trader Would Use The Bear Flag Pattern In Their Trading

Retail traders and SMC traders tend to actually enter these bear flag patterns in similar ways, but the only difference is that retail traders usually will have a larger overall stop loss on average, and a lot of the time are looking to enter when price breaks out of the range (the flag) portion of the pattern.

Your average trader is going to approach a bear flag pattern by looking at the range and identifying where the high and low is using trendlines in order to define where they’re going to start looking for their actual trade setup, and they’ll look to enter using a market order as price is breaking out of the range. While this isn’t the worst way to approach the market, without the context of what the higher timeframe is doing it can leave you entering a low poor quality position in the market without even being aware of it.

The other downside to entering the way an average retail trader would enter this type of trade setup is that they typically will get a less than favorable entry price and a large stop loss meaning they only stand to make a few +R on the trade, and that’s only assuming that it actually runs.

How We Use The Bear Flag Pattern At Phantom Trading

At Phantom Trading, we approach this pattern a bit differently by first doing our top-down multi-timeframe analysis to get an idea of what the market structure and expectational orderflow is for each timeframe. The reason we do this is to get an understanding of the probability of price moving in that direction, as well as to approximate where price may head if it does set up accordingly.

Typically we’d be looking for this setup to happen on a timeframe like the 15-minute to get a sense of a good quality supply chain, or liquidity sweep of supply, plus a demand failure to start validating that point of interest (POI) on the 15-minute timeframe to use to trade off of directly, or to use as a POI to look for 1-minute setups within.

Once price action has set itself up cleanly and starts sweeping previous supply levels (taking liquidity), and begins violating levels of demand, or starts to create a clear supply chain and subsequently takes out demand levels below, we can start to assume that demand is in control. With this being a bearish pattern, we really just look at the flag portion (correction) of the pattern as a temporary bullish corrective move within the impulsive and corrective phases of bullish (uptrending) price action in the market.

How To Use A Bear Flag Pattern To Trade Counter-Trend

In order to use a bear flag to take counter-trend trades, all we need to do is follow the demand chain before it fails. This means we use the stack of demand POIs to look for counter-trend longs and look to take heavy partials or fully exit our position at the nearest 15m POI or sooner.

Since we’re trading counter-trend and expecting the demand levels to fail and be used as liquidity to target, we want to exercise caution with these trades and not try to enter too late (after 3 mitigations of 15-minute demand zones or more). If you try to use these POIs after the demand chain has overdeveloped the more risk there is of price breaking out against you to complete the bear flag pattern.

Bear Flags In Conclusion

The bear flag is a very versatile trading pattern that can be used to anticipate breakouts in the market, and you can also see how we can capitalise on the pro-trend move (in the direction of the breakout) as well as take a counter-trend move to extract profit out of the flag as it’s forming.

Remember, using this pattern in isolation may be difficult so we highly recommend checking to see if there are demand zones to the left, and taking the higher timeframe market structure into account too.

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Robert Castillo
FX Trader & Analyst
Writer & Editor

Rob is a funded trader from Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading, he enjoys making music, boxing, and riding motorcycles.