EMA Bull Flag Forex Strategy

January 20, 2018

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EMA Bull Flag Forex Strategy

Flag patterns are one of the most reliable continuation patterns in forex trading. Some forward tested bull flag strategies are even said to be 67% reliable. Given that bull flag patterns usually yield more than 1:2 risk reward ratio, that should be a trading edge right there. Many pattern day traders made their fortunes out of these patterns. But many traders also fail to do so. Why is it?

Recognizing patterns on forex charts is very hard to do. Even after sitting in front of charts day in and day out for thousands of hours, one might still find it hard to recognize patterns. But there is a way to make it easier to identify these patterns.

The 3 EMA Band

In this forex strategy, we will use moving averages as a hint where bull flag patterns may occur. Price tends to bounce off moving averages, making it easier to predict where these patterns may take off.

Exponential Moving Averages (EMA) are highly responsive moving averages that seem to hug closer to price, yet are also smooth enough to make it easier on the trader’s eyes. Even as price moves erratically, EMA bands still tend to be layered smoothly on the chart.

As a comparison, here is an example of a 20-30-100 EMA band.

And here is an example of the same 20-30-100 band, on the same chart, using Simple Moving Average (SMA).

Notice how the space between the SMA bands tend to narrow and widen in some areas, while the EMA bands tend to be more layered.

For this strategy, the goal is to assist traders in identifying bull flag patterns by using the bounces off the EMAs as a hint where price may take off.

With this strategy, we will use the 20-30-100 EMA to help us identify the areas where bull flags may occur, and where it may bounce.

On the chart below, are you able to recognize a bull flag pattern?

Some may, some may not.

But here is the same chart with the 3 EMAs.

Notice how easier it is to recognize patterns using the 3 EMAs. And notice how price broke out of the bull flag pattern in the area of the 20-30 EMA.

The Bull Flag Setup – Entry, Stop Loss & Take Profit

To consider trading this strategy, the 20-30-100 EMA should be layered smoothly with the 20 EMA on top, 30 EMA in the middle, and 100 EMA at the bottom. Naturally, price would also tend stay above the EMA bands. This will signify an uptrend where we can catch bull flag setups.

An identifiable bull flag should be formed in the area near the 20-30 EMA. However, we will have to wait for price to break out above the resistance and retest the broken resistance before we place our pending orders.

If these things happen, then we could place our pending buy stop order at the high of the breakout candle.

The stop loss should be placed just a few pips below the retest candle.

The target take profits could be divided into two if a swing high was formed on the apex of the bull flag pattern.

The first take profit would be at the high of the bull flag pattern.

The second take profit target would be based on the length of the pole of the flag. We will be measuring the length of the pole, and use it as the basis of the anticipated thrust of the breakout. We will be targeting only 80% of that thrust, since sometimes the whole thrust doesn’t get completed.

On this trade the setup was successful. A strong candle broke out of the resistance line and a retest happened. This is an hourly chart so it shouldn’t be a problem setting up the buy stop order. As soon as the buy stop order was hit, the trade was entered, and it was smooth sailing after that. The trade gained 30 pips while risking only 7.5 pips, for a risk reward ratio of 1:4.

Conclusion

The bull flag pattern based on the 3 EMA is an excellent trading strategy. There are even traders who made a fortune trading this pattern alone. However, this is not something that you would see every day on a single currency pair. To find these opportunities, you would have to scan different currency pairs on different timeframes. As soon as you find one, you would have to wait for the breakout and retest price action. Do this, repeat and you should make some money out of this.