When I first encountered this incredible pattern, I was stunned!
“It can’t really be that simple,” I told myself as I saw chart after chart revealing the undeniable truth. The evidence was clear as day and impossible to ignore.
This unique chart pattern has a proven record of signaling high-profit trade setups with very low risk in a short timespan.
It’s so effective for earning huge windfalls – in some cases even doubling or tripling your investment in just a few months – that I’ve come to the conclusion it’s the most profitable chart pattern in the world.
A big statement? Absolutely. But it’s backed by 20 years of my personal research and professional experience as a successful trader and investor.
Nor am I alone. Legendary investor William O’Neil, founder of Investor’s Business Daily, called it “the strongest of patterns.”
That’s why it’s essential that you, too, become familiar with how and why this pattern works.
I’ve put together this short guide revealing how and why this chart pattern can grow your account faster than you ever thought.
So let’s get started.
The Bull Flag: Heavyweight Champ of Chart Patterns
The bull flag pattern is the centerpiece of the Chairman’s Circle Breakout Alert service. But what exactly is a flag pattern?
A flag formation is a chart pattern that acts as a “continuation” indicator for the ongoing trend. In other words, flag patterns are bullish when they appear in an uptrend and bearish when found in a downtrend.
A flag pattern has three key components: the pole, the flag and the breakout.
- Pole: This is the first stage of pattern development. It typically appears as a sudden sharp uptrend over a short period of time.
- Flag: The second stage of pattern development, it involves the price action beginning to consolidate or cluster within a downtrending trading range.
- Breakout: This is the final stage of pattern development. In a true flag pattern, a breakout through the top of the flag formation results in an uptrend of at least equal magnitude, or the length of the flag pole.
Now take a look at the chart below.
Not all flag patterns look exactly like an actual flag. But the key components outlined above should always be present.
In the chart above, the pole is the sharp uptrend that occurs from late September through November. It’s measured by the change in price from the base of the uptrend to the top of the flag formation. You can see that the pole’s length is 1,772 points, or $17.72, from its base to its top.
The flag formation is the tight downtrending trading range highlighted in yellow.
The completion of the pattern is its breakout, which occurs when the price breaches through the top of the flag’s trading range. Sometimes, traders wait for the price to rise above the height of the flag pole as a confirmation of the breakout.
The resulting uptrend, measured from the breakout point, is typically a price change that’s at least equal in length to the flag pole. In the previous chart, that means it rose by $17.72.
(Note: In a typical flag pattern, you might also notice that the trading volume spikes near the height of the flagpole and then declines during the formation of the actual flag. Then, during the breakout phase, the volume begins to rise back up. This is another helpful feature to look for when identifying flag patterns.)
Also, notice that not only does the price rise up to our target, it also gaps up toward it! That’s even greater evidence that this is a strong bullish trend.
Why Flag Patterns Develop
You may be wondering why this pattern forms the way it does.
Like most price actions in the stock market, it comes down to understanding crowd psychology.
When a stock’s price rises significantly in a short timespan, traders who have managed to hit it big will begin to take profits.
The short-term selling pressure leads to a temporary pause in the uptrend, as profit takers begin to exit the market and new bullish traders hoping to buy on the dip start coming in.
This is the consolidation period, where the trading range occurs. The new traders effectively replace the profit takers and maintain bullish demand for the stock to rise.
In other words, the back and forth of bullish traders buying at bargain prices, and bearish sellers taking profits, forms the trading range.
Once enough sellers exit the market, the trend can finally break through above the trading range and continue the uptrend.
As you can see, crowd psychology plays a crucial role in driving this pattern to completion. But it’s not just a matter of theory. As I pointed out earlier, this pattern has a proven record of forecasting huge profit opportunities with relatively low risk.
In his extensive study of chart patterns in the stock market, Thomas Bulkowski – a veteran technical analyst and highly successful trader – found that, in bull markets, stocks showing a bull flag pattern generated an average rise of 69% in around just 39 days!
And in bear markets? He found the average gain was 42%!
Not only are those profits insane for such a brief timespan, but there also wasn’t a single instance where he found this pattern didn’t lead to at least a 5% rise in the stock.
The flag pattern is so effective that even Jesse Livermore – regarded by many as the greatest stock trader of all time – was known to short stocks using this pattern during the Great Depression.
With all this evidence to back up the power of the flag pattern, you’d imagine that every trader in the world would devote himself to the strategy.
But the truth is very few make money on it.
Why? Because too many traders lack the patience and discipline needed to take advantage of these unique breakout opportunities… and even fewer are prepared to utilize them with an exact plan.
So let’s go over our plan for successfully trading it.
Max Out Your Profits; Reduce Your Risk
When it comes to any trading strategy, it’s important to put risk management first. That means knowing exactly how much you’re willing to lose before you enter an investment.
My recommendations will always favor high-reward, low-risk setups.
I’ll only look for trades that offer at least a 2:1 reward to risk ratio, and preferably 3:1. That means if I’m willing to risk five points on a stock, I have to have a price target that is at least 10 points higher, if not 15.
For example, let’s say a stock is currently in a bull flag formation and we enter the trade at $20. Based on our analysis of the trend, we’ve determined a price target of $35.
For our target reward of $15 per share (a gain of 75%), we would typically risk no more than $5. That means we’d set our sell stop at $15 ($5 below our entry price).
And if our trade performs as expected and the stock price rises to $35, we either take profits immediately or secure our gains by raising our stop and letting our position continue to run.
Like I said earlier, we want to know exactly how much we’re risking and for how much of a potential profit BEFORE we enter a single trade. That’s why keeping a strict stop policy in place is what makes our trading strategy low risk.
And the beauty is that this strategy is both incredibly simple and highly effective. Yet so few have the skill and experience to recognize these trade opportunities when they arise.
Fortunately for you, you’ll have me to guide you through each trade so you can achieve these profits for yourself.
Now that you’ve got a keen sense of this strategy’s ins and outs, it’s time to put it to work.
When you receive your first Breakout alert, simply follow my instructions for executing the trade… and you’ll be well on your way to using this incredibly underappreciated trading tool to take home big gains from the market.