Bull Flag Breakouts: A Powerful Pattern for Traders

If you've studied historically winning stocks, you'll notice a recurring pattern—they tend to move in stair steps. This means they'll make a significant move, pull back or go sideways for a while, and then make another substantial move. This stair-stepping behavior is how most of the strongest stocks act. As traders, we can use this pattern to gain an edge in the market.

How to Find Bull Flag Setups

To find bull flag setups, focus on scanning for stocks that have shown the most significant gains over the past 5 days.

The Three Steps to a Bull Flag Setup

1. A Big Move Higher

In the past 5 days, look for a significant move higher. This move can range from 20-100% or more and typically lasts from 3-10 days.

2. Orderly Pullback and Consolidation

After the big move, the stock will usually enter a consolidation phase, characterized by a tightening range. During this phase, the stock often decreases in volume and holds its gains. The consolidation phase typically lasts between 2 to 8 days.

3. Range Expansion Breakout

A breakout from this consolidation indicates a range expansion and a potential continuation of the upward trend. This is where you enter for the next leg up.

How to Trade Bull Flag Setups

Identify the Setups

• Watchlist Preparation: Have a watchlist ready before the market opens. Set alerts and decide how many shares you want to buy.
• Opening Range Highs: Enter when you see a clear range expansion above the previous tight consolidation. Stocks typically breakout during the morning and don't look back.

Entering the Trade

You can use any timeframe or a combination of them. You don’t necessarily need to use intraday charts; you can look at the daily chart and enter when the stock starts breaking out. Some traders anticipate the breakout or use the intraday charts to time their entry, but this requires more skill and experience.

Setting the Stop-Loss

• Stop Placement: The stop should be at the low of the day or higher. I tend to avoid stops that are greater than 5% as the risk reward is not favorable.
• Risk Management: If the stop is hit I get out and do not reenter again, there are plenty of stocks in the sea and a breakout that does not hold its gains is not a good sign.

Taking Profits

• Initial Profit-Taking: Sell 1/2 of the position after 3-5 days, then move the stop to break-even.
• Trailing Stop: Exit the rest when there is a clear range expansion to the downside.

In a bullish market, it is common to get moves that are 10 times your initial risk if you are good at selecting setups and enter them early.

Variations and Timeframes

While I use the daily chart to find these setups as a swing trader, this setup also works on weekly charts and intraday (5-minute) charts. On the intraday timeframe, the markets are a bit choppier so you will often get fake breakouts and breakdowns. On the daily chart, this setup can also be referred to as high tight flags, flat channels, symmetrical triangles, or descending triangles.

Examples of Breakout Setups

EVRI in 6/7/24

Before: (EVRI chart before breakout)

After: (EVRI chart after breakout)

ARHS in 5/24/24

Before: (ARHS chart before breakout)

After: (MNKD chart after breakout)

TRI 5/15/24

Before: (TRI chart before breakout)

After: (TRI chart after breakout)

Conclusion

Bull flag breakouts are a powerful pattern for traders looking to capitalize on significant market moves. By identifying leading stocks, recognizing the three-step setup, and executing trades with disciplined entry and exit strategies, you can gain a considerable edge in the market. Keep refining your skills and stay vigilant for this highly profitable setup.

Happy Hunting!