What is a Flag Pattern in Crypto Trading?
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| What is a Flag Pattern in Crypto Trading |
Flag patterns are patterns on price charts that are widely used by crypto traders to see trends in the crypto market. By spotting trends early, crypto traders can determine the right strategy to generate bigger profits. Check out the full explanation of what flag patterns are in crypto trading through the following article!
Also read: 13 Complete Candlestick Patterns in Crypto and Stocks
What are Flag Patterns?
A flag pattern is a pattern on a price chart that is used to identify a possible continuation of a previous market trend. This pattern is characterized by a chart with a sharp reverse trend that moves against the previously analyzed price trend.
Gordon Scott from Investopedia said that the origin of the term flag pattern was created because the price pattern that appears is like a flag, in which the flag section indicates a sharp price reversal trend while the flagpole section shows a price movement trend in the short term.
5 Components in a Flag Pattern
According to Investopedia, a flag pattern is a pattern that is easy to identify. In general, a flag pattern consists of 5-20 candlesticks that represent trends in the market. Traders can usually recognize this pattern from the five components that the flag pattern has, namely:
- The previous current trend ( flag pole )
- Periods of consolidation, accumulation, relatively flat trend ( bullish/bearish flag )
- Price reversal point ( retracement )
- A breakout occurred (significant trend chart change compared to period 2)
- The price target that moves according to the flag pole trend (confirmation of price movement in the same direction as the breakout condition )
Types of Flag Patterns
A flag pattern is a price movement pattern that gives a bullish or bearish signal, depending on the type and structure of the pattern. Based on these signals, the flag pattern itself is divided into two types, namely bullish flags which indicate an upward price trend, and bearish flags which indicate a downward price trend.
The two types of flag patterns have almost the same structure, but with different trend directions and transaction volume patterns.
Bullish Flag Pattern
The bullish flag pattern is a pattern that indicates an upward price trend. Tony Spilotro from News BTC said that the bullish flag chart is characterized by an increase in price in the previous trend, followed by a slight decrease in price which creates a "bullish flag ", a period of consolidation, and is followed by a breakout (a higher and faster price increase than usual).
Bullish Flag Pattern Example
Sam Ouimet of Coindesk reported that the bullish flag is seen during the movement of the price of Bitcoin on February 20, 2017. The graph to the pattern forming flagpole ( flag pole ) looks at the price movement of Bitcoin from $ 917 to $ 1228 figure.
Although it is not always accompanied by a high volume spike, Scott revealed that crypto analysts and traders are attracted to this pattern as it indicates a great deal of enthusiasm from new crypto investors and traders.
Bearish Flag Pattern
The bearish flag pattern is a pattern that indicates a downward trend in prices to investors and traders. This pattern is formed with a downward price movement from the previous trend, followed by an increasing flag pole pattern, and followed by a downward price trend.
Bearish Flag Pattern Example
Reporting from the Coindesk page, Ouimet wrote that a bearish flag pattern can be found in the ETH price movement data on March 17, 2018. In the bearish flag pole section, the chart shows a drastic price decline from $699 to $463.
Scott revealed that the period of consolidation in the bearish flag pattern is not always accompanied by a declining transaction volume. The downward trend in prices is precisely due to the anxiety of investors and traders about the possible decline in the price of crypto assets in the future.
How to Use Flag Pattern in Trading?
To determine a crypto trading strategy, traders usually only need to identify the three main points of the flag pattern, namely, entry, stop loss, and profit targets. Here's the full explanation.
Entry
Scott recommends crypto traders take steps to open positions after seeing a breakout or breakdown point. The reason is, there is a possibility that the pattern seen at the beginning is a false pattern or a temporary signal.
Stop Loss
The consolidation period in the flag pattern consists of an uptrend line and a downtrend line. Generally, traders use a downward trend line as a reference, where the stop loss point is set a few levels below the lowest price of the trend line.
Profit Target
Gordon Scott says that one of the best methods a trader can use to estimate trading profits is to calculate the distance between the bottom and the top of the flag pole. Suppose the breakout point is at Rp. 75,000. Meanwhile, the base of the flag pole is at IDR 50,000 and the peak is at IDR 100,000.
So, the estimated profit target that traders can get is
= Value breakout + (peak value of the flag pole - basic value flag pole )
= IDR 75,000 + (IDR 100,000 – IDR 50,000)
= Rp125,000
That was a review of what the flag pattern is in crypto, its types, and examples. For those of you who are interested in investing and trading crypto easily, download Pintu, an Indonesian cryptocurrency application that has been officially registered with CoFTRA. AT Pintu, you can buy and sell various crypto assets starting from only IDR 11,000, you know!
* Disclaimer:
This content aims to enrich the reader's information. Always do some independent research and use cold cash before investing. All activities of buying and selling crypto assets are the responsibility of the reader.
Reference:
Coindesk, Crypto Trading 101: Bull and Bear Flags (And What They Mean for Price). Retrieved date: 15-11-2021.
Forbes, Why You Should Watch These Crypto Chart Patterns. Retrieved date: 15-11-2021.
Investopedia, Flag. Retrieved date: 15-11-2021.
News BTC, Bitcoin Bull Flag Psychology. Retrieved date: 15-11-2021.
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