When I was a kid, my dad told me this story about some young lumberjack wandered into a logging camp inquiring about a job. He got hired on and pretty soon he worked his way up to being one of the top lumberjacks in his camp. He got so good, that lumberjacks used to bet him money over who could chop down the most trees in a given day. He took every challenge and won.
Over time, news spread to the surrounding camps and new challengers came calling. He took every challenge and, again, won every challenge by cutting down more trees than any other lumberjack in the surrounding area.
With no one left to challenge him, he settled into life in the logging camp.
One day, an old man came looking for him and challenged him.
The big, burly young lumberjack laughed and said he didn’t have a chance and to go back home before he got hurt.
The old man pulled out a wad of money and reissued his challenge and bet him dollar for dollar that he could chop down more trees than him during a day’s work.
The Bull Flag Pattern is a reliable continuation pattern that can be used in trading stocks if you understand the 7 key components to trade it successfully. Courtesy of StockCharts.com
Price patterns are nothing new when it comes to trading in the market but some traders rely on price patterns as their core method in trading stocks. A price pattern appears after a stock’s price enters a period of price contraction and begins trading between high and low prices over a period of time. When analyzing these charts, experts look for certain patterns to form that indicate it might be a good time to buy or sell a certain security when the pattern breaks. For trading price trends, one type of pattern that yields reliable results is a continuation pattern such as the bull flag continuation pattern.
A bull flag pattern on a stock analysis chart forms when there is an active upward trend in a security; this is then followed by a period of slightly downward activity (called a pause, because it is the security markets natural attempt at correction that is often seen with an active upward or downward trend), and this is often in turn followed by the resumption of the same active upward price trend.
KEY COMPONENTS OF A BULL FLAG PATTERN
In order to be a true continuation pattern, it is first required to see the establishment of a prior trend. In the case of a bull flag pattern this is always in the upward direction. There will also be evidence of a sharp move or advance often based on a heavy volume of trading for the security (sometimes it can contain small gaps also). This will be the first of two advances in a typical bull flag pattern; the second one will come after the flag pattern emerges.
A good stock trading tip is to look for well-formed base patterns in potential stock trades for higher returns. Base patterns form the launching pad that runaway stocks use as a platform to explode into higher price values.
Consider this lesson from Investors.com:
“When scouting for excellent base patterns, focus on those that have more up weeks in heavy volume than down weeks in above-average trade. If that’s the case, buyers are in control, not sellers.
A stock’s price action is important, but a move means a lot more when it’s accompanied by big volume. This combination can give you clues about the future direction of a stock.
Herbalife (HLF) forms a classic base pattern as accumulation is revealed through the stock’s volume.
CAN SLIM investing involves identifying stocks being scooped up by the big money. So focus on stocks in bases with more up weeks in high turnover than down weeks in big volume. They’re the ones being accumulated by professional investors, such as mutual funds, banks, insurers and hedge funds.
On the flip side, bases with more down weeks in big turnover than up weeks tell you that they’re under distribution, or being sold heavily by institutions.
Professionals don’t always buy at new highs. Some do their shopping during consolidation periods, which create various chart patterns.
Institutions will take weeks or months to build a full position into a stock. Their buying leaves footprints in the form of tall volume bars…