Understanding the Descending Flag Pattern in Crypto Trading
The crypto market is known for being volatile and unpredictable. It can change from bullish to bearish in a single day. Its volatile nature makes it difficult for traders to navigate, which is why many rely on technical analysis. Technical analysis is a way of predicting a cryptocurrency's price behavior via various tools and technical indicators. The most basic tool used to carry out technical analysis is, of course, the price chart. The chart shows the price movements of an asset over certain time periods. After studying them for years, traders started spotting patterns.
Among many different patterns that can appear is one called the descending flag pattern. This guide will explore what this pattern is, what it looks like, and how it affects the market. Being able to recognize a descending flag pattern is crucial for any trader. Once you understand the pattern, you can use it to your advantage and incorporate it in your own trading strategy.
What are chart patterns in crypto trading?
Chart patterns are one of the tools that traders use to try to predict the behavior of the crypto market. Due to the fact that cryptocurrencies aren’t backed by any asset of value, their prices are highly volatile. It can take a positive or a negative swing depending on supply and demand and new developments. Even a single large transaction is enough to cause the market to shift in a certain direction.
Chart patterns, or trading patterns can present themselves at any time. Some of the classic trading patterns include:
- Flags
- Triangles
- Wedges
- Double Top
- Double Bottom
- Head and shoulders
- Inverted head and shoulders
Once the trader knows what to expect, they can come up with adequate trading strategies. This increases their profit potential since they know whether to buy or sell based on price movements. Today however, we will focus only on the descending flag pattern.
What is the descending flag pattern?
In the previous segment, we mentioned flags as one group of chart patterns that may appear. However, flags can also be split into three subsections:
- Ascending (bear) flag
- Descending (bull) flag
- Pennant
The descending flag pattern is a technical analysis chart pattern that falls under the category of continuation patterns. This means that the price starts a trend, experiences a brief period of consolidation, and then continues the trend.
As its name suggests, the “descending flag” indicates that the price starts to descend after originally heading up. Once the pattern has formed, the original bullish trend continues. This implies that the descending flag is a bullish indicator. It has a strong bullish momentum which only gets interrupted temporarily.
However, those who don’t know how to recognize this pattern may interpret it incorrectly. They might think that the bullish momentum has disappeared, and that the price will soon crash. However, this isn’t the case. The bullish continuation pattern tends to continue in most cases. Meanwhile, those who sold during the consolidation period could miss a big opportunity
This is why spotting patterns is crucial if you wish to be a successful trader within the crypto market.
What does it look like?
The descending flag pattern forms when a sharp upward trend is interrupted by a consolidation period. During this period, the price trades in a narrow range, heading up and down, each time with slightly lower supports and resistances. The consolidation phase forms a flag-shaped pattern that points down. The upper and lower boundaries — supports and resistances — form two parallel trend lines that descend.
Then, the consolidation period ends just as abruptly as it started, and the original upward trend continues. Of course, it goes without saying, this doesn’t happen all the time, which is why you should use other indicators alongside any technical analysis pattern.
How to trade during the descending flag?
The creation of a descending flag takes place during an upward trend. As mentioned, this is a bullish continuation pattern, meaning that the upward trend should resume briefly. With that said, most traders will have invested at the start of the trend. However, the consolidation period might seem bearish to them, which may cause them to sell.
This is where the dilemma emerges. If the new bearish behavior is just a consolidation period, the best decision would be to do nothing. Traders should simply wait it out, and then the price surge will continue. However, we also mentioned that the descending flag pattern could be disrupted. If this happens, the price could start to drop.
Therefore, the pattern could be misleading at times. The problem is that no one can accurately predict what will happen. This is why traders should use risk management tools. Essentially, they should decide on their selling level if the price starts falling. They will miss an opportunity if they sell and the price begins to surge. However, if they don’t sell and the price crashes, they will experience losses.
What is the difference between the ascending and descending flag pattern?
The ascending flag pattern looks very similar to the descending flag pattern, but they take place in different stages of the market. The descending flag, as mentioned, occurs in a bullish market, with the flag pointing downwards. The ascending flag, on the other hand, takes place in bearish market structures.
Other than that, the two patterns express the same behavior. The price initiates a trend — bullish or bearish, depending on the type of flag — which gets interrupted by brief periods of consolidation. During the consolidation period, an opposite trend takes place. In bearish markets, the consolidation trend looks like the price is recovering. In bullish markets, it looks like the price could be on the verge of falling.
Then, as the pattern plays out, the price resumes its original trend. However, as mentioned above, this might not play out every time, and the market could react differently due to sentiment, news, manipulation and other factors.
Pros and cons of descending flag pattern
The descending flag pattern is one of the popular and useful indicators of upcoming price movement. As such, it has its positives and its negatives. Traders should be closely familiar with both, as the positives offer clear benefits, while negatives provide a warning. For example:
Descending flag pros:
- Indicates the continuation of the initial trend
- Provides clear entry and exit points of the consolidation phase
- It can be used alongside other technical indicators and analysis tools
Descending flag cons:
- It can provide false signals
- Market volatility may disrupt it
- Traders must have patience and discipline to wait for the pattern to form
Are descending flag patterns useful?
The descending flag pattern can be very useful, as it could signal whether a trend reversal is on the horizon. However, by itself, it’s not enough for you to form a solid trading strategy. As such, it is best to use it in combination with other technical analysis tools, signals, and indicators. If multiple tools suggest the same development, it is more likely to happen than if only one suggests it. That way, you stand to increase your profit potential simply by identifying trends correctly.
FAQs
Is a descending flag bullish?
Yes, a descending flag is considered a bullish signal. It is formed after the price starts surging, and it indicates that the surge will continue. However, it is important to remember that it doesn’t guarantee it.
What does a descending triangle indicate?
The descending triangle shows that demand for an asset in question is weakening. It shows that the downward momentum is likely to continue. When it gets formed, the price will likely break its support line soon.
What is a bullish flag pattern?
A bullish flag pattern, or descending flag pattern, is a pattern that suggests that the price will go up. The flag pattern points down, which is actually a positive signal.
Are ascending triangles good or bad?
An ascending triangle is taken as a good signal, as it shows that demand for an asset is growing. While the price is prevented from going up by a resistance level, each rejection gets weaker and weaker. In the end, the price will break the resistance and surge up.
What is a bearish flag?
A bearish flag, also known as ascending flag, is a pattern that tends to occur during bearish phases. The price starts to go down, and then gets interrupted by a consolidation phase during which it sees mild recovery. But, as soon as the phase ends, the original bearish momentum continues.
