candlestick bullish reversal patterns

candlestick bullish reversal patterns

Using Bullish Candlestick Patterns To Buy Stocks

Candlestick charts are a type of financial chart for tracking the movement of securities. They have their origins in the centuries-old Japanese rice trade and have made their way into modern day price charting. Some investors find them more visually appealing than the standard bar charts and the price actions easier to interpret.

Candlesticks are so named because the rectangular shape and lines on either end resemble a candle with wicks. Each candlestick usually represents one day’s worth of price data about a stock. Over time, the candlesticks group into recognizable patterns that investors can use to make buying and selling decisions. In this article we will focus on identifying bullish candlestick patterns that signal a buying opportunity. (Read more in Candlestick Charting: What Is It?)

[ Candlestick charts are an excellent way to read market sentiment at a glance, but they work best when used in combination with other forms of technical analysis. For example, traders may use a combination of chart patterns and candlesticks to identify potential breakouts or breakdowns. Investopedia's Technical Analysis Course provides a comprehensive review of basic and advanced technical analysis, chart patterns, and technical indicators in over five hours of on-demand video, exercises, and interactive content. ]

How to Read a Single Candlestick

Each candlestick represents one day’s worth of price data about a stock through four pieces of information: the opening price, the closing price, the high price, and the low price. The color of the central rectangle (called the real body) tells investors whether the opening price or the closing price was higher. A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure. The lines at both ends of a candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow shows the stock’s highest price for the day and the lower shadow shows the lowest price for the day.

Bullish Candlestick Patterns

Over time, groups of daily candlesticks fall into recognizable patterns with descriptive names like three white soldiers, dark cloud cover, hammer, morning star, and abandoned baby, to name just a few. Patterns form over a period of one to four weeks and are a source of valuable insight into a stock’s future price action. Before we delve into individual bullish candlestick patterns, note the following two principles:

  1. Bullish reversal patterns should form within a downtrend. Otherwise, it’s not a bullish pattern, but a continuation pattern.
  2. Most bullish reversal patterns require bullish confirmation. In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up, and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern.

The bullish reversal patterns can further be confirmed through other means of traditional technical analysis—like trend lines, momentum oscillators, or volume indicators—to reaffirm buying pressure. (For insight into ancillary technical indicators see Basics of Technical Analysis) There are great many candlestick patterns that indicate an opportunity to buy. We will focus on five bullish candlestick patterns that give the strongest reversal signal.

1. The Hammer or The Inverted Hammer

The Hammer is a bullish reversal pattern, which signals that a stock is nearing bottom in a downtrend. The body of the candle is short with a longer lower shadow which is a sign of sellers driving prices lower during the trading session, only to be followed by strong buying pressure to end the session on a higher close. Before we jump in on the bullish reversal action, however, we must confirm the upward trend by watching it closely for the next few days. The reversal must also be validated through the rise in the trading volume.

The Inverted Hammer also forms in a downtrend and represents a likely trend reversal or support. It’s identical to the Hammer except for the longer upper shadow, which indicates buying pressure after the opening price, followed by considerable selling pressure, which however wasn’t enough to bring the price down below its opening value. Again, bullish confirmation is required and it can come in the form of a long hollow candlestick or a gap up, accompanied by a heavy trading volume.

The Bullish Engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows. The Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle. On the second day of the pattern, price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers. It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed.

Similar to the engulfing pattern, the Piercing Line is a two-candle bullish reversal pattern, also occurring in downtrends. The first long black candle is followed by a white candle that opens lower than the previous close. Soon thereafter, the buying pressure pushes the price up halfway or more (preferably two-thirds of the way) into the real body of the black candle.

As the name indicates, the Morning Star is a sign of hope and a new beginning in a gloomy downtrend. The pattern consists of three candles: one short-bodied candle (called a doji or a spinning top) between a preceding long black candle and a succeeding long white one. The color of the real body of the short candle can be either white or black, and there is no overlap between its body and that of the black candle before. It shows that the selling pressure that was there the day before is now subsiding. The third white candle overlaps with the body of the black candle and shows a renewed buyer pressure and a start of a bullish reversal, especially if confirmed by the higher volume.

5. The Three White Soldiers

This pattern is usually observed after a period of downtrend or in price consolidation. It consists of three long white candles that close progressively higher on each subsequent trading day. Each candle opens higher than then previous open and closes near the high of the day, showing a steady advance of buying pressure. Investors should exercise caution when white candles appear to be too long as that may attract short sellers and push the price of the stock further down. (See more in How do I build a profitable strategy when spotting a Three White Soldiers Pattern?)

The chart below for Enbridge, Inc. (ENB) shows three of the bullish reversal patterns discussed above: the Inverted Hammer, the Piercing Line, and the Hammer.

The chart for Pacific DataVision, Inc. (PDVW) shows the Three White Soldiers pattern. Note how the reversal in downtrend is confirmed by the sharp increase in the trading volume.

Chapter 6 – Japanese Candlesticks – Bullish Reversal Patterns

As we are concerned with spotting changes in price moves we will focus on the Reversal Patterns. This section is the Bullish Reversal Pattern meaning when a price is moving down and you see this sign, the price may change direction and start moving up in the short term. These are the most common patterns, not an exhaustive list but it will give you an idea of what is common in all patterns.

The Hammer – this hammer can be either filled or hollow, the Japanese say the price is hammering out a bottom. What is important here is that at the end of a down move, the buyers and sellers test out an extreme low (the long shadow) however by the closing bell the price has returned higher.

The lows were tested but price found no comfort there, there were enough buyers at this level to move the price back up.

Inverted Hammer – this hammer shows that at the end of a downward move the stock gaps significantly down there is much movement throughout the day moving back to fill the gap but the price settles lower for the day. This shows significant price action and that buyers are showing strong interest in the stock at these levels.

Bullish Engulfing – here we have a negative spinning top or a short day during a downtrend, then followed by a long day of real power the long white body tells you something significant has changed and so has the sentiment, a clear trend reversal.

Bullish Harami – during a downtrend we experience a very negative “Long Day” followed by a short positive day. This indicates the market participants have found a level they are happy with. Candlesticks are most useful when predicting a change in trend, this might be from an “up” to a “down” trend or from a “down” trend to a “sideways” trend. In the case of this Harami, the change in trend may be from downwards to sideways.

Piercing Line – this shows a day of real strength following a very negative day. The White candle gaps down on open but the buyers show real demand throughout the day to retrace more than 50% of the previous day’s losses.

Each Candlestick pattern has a specific story to tell. If you can understand the story being told you do not need to memorize the name of each pattern and the textbook meaning. Re-read this article and try to imagine the story. Combining the action of multiple days will allow you to understand the current psychology of the market participants, therefore, giving you an insight into tomorrows price action.

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Other Chapters of the Liberated Stock Trader Book are listed below

This chapter sets the stage for the two key areas of stock market technical analysis and the fundamental analysis of companies including macro and micro economics

This chapter looks at what REALLY makes the markets move, what causes boom and bust cycles and how to spot them.

What are stock market cycles and the cycles of business and economies. Important information that you need to appreciate as part of your core analysis.

Next we move into fundamental analysis and the financial fitness of a company. All the major indicators and measures are covered.

Stock screening means using criteria to short list the kind of stock that you want to purchase. A vital part of any stock market training

Once you know the business climate, the state of the economy and you have shortlisted the stocks you want to buy. The next thing to do is the technical analysis. Even if the company looks great on paper, if the stock price is plummeting you do not want to buy it until it has bottomed out. This is called catching a falling knife. This is what chart patterns and technical analysis helps with.

Here we get into the art of drawing on charts to help you visualize the Supply and Demand on the stock, the direction of the trend and estimate how long the trend will last. Vital for you to establish buy and sell signals.

Which indicators should you use, there are literally hundreds of stock chart indicators. Each have a specific use case and application, which should you use?

Volume is a vital indicator along with price. Both of these you need to understand in granular detail, you will learn everything you need to know.

Moving to advanced technical analysis we cover indicators such as parabolic SAR and point & figure charts.

How are the market participants feeling? Positive, Negative or indifferent. Consider that 90% of people fail to beat the average market returns, sentiment indicators can be a great contrary indicator. Lean how to use them to your advantage.

Understanding how you want to invest, how much time you have and your time horizon. These questions all help you to understand what type of investor you want to be, this then enables you to select the right strategy for you. Then we move on to building your stock investing system, a critical element to your plan.

Candlestick Bullish Reversal Patterns

Candlestick Bullish Reversal Patterns

There are dozens of bullish reversal candlestick patterns. We have elected to narrow the field by selecting the most popular for detailed explanations. Below are some of the key bullish reversal patterns with the number of candlesticks required in parentheses.

The hammer and inverted hammer were covered in the article Introduction to Candlesticks. This article will focus on the other six patterns. For a complete list of bullish (and bearish) reversal patterns, see Greg Morris' book, Candlestick Charting Explained.

Before moving on to individual patterns, certain guidelines should be established:

Patterns can form with one or more candlesticks; most require bullish confirmation. The actual reversal indicates that buyers overcame prior selling pressure, but it remains unclear whether new buyers will bid prices higher. Without confirmation, these patterns would be considered neutral and merely indicate a potential support level at best. Bullish confirmation means further upside follow through and can come as a gap up, long white candlestick or high volume advance. Because candlestick patterns are short-term and usually effective for only 1 or 2 weeks, bullish confirmation should come within 1 to 3 days after the pattern.

To be considered a bullish reversal, there should be an existing downtrend to reverse. A bullish engulfing at new highs can hardly be considered a bullish reversal pattern. Such formations would indicate continued buying pressure and could be considered a continuation pattern. In the Ciena example below, the pattern in the red oval looks like a bullish engulfing, but formed near resistance after about a 30 point advance. The pattern does show strength, but is more likely a continuation at this point than a reversal pattern.

The existence of a downtrend can be determined by using moving averages, peak/trough analysis or trend lines. A security could be deemed in a downtrend based on one of the following:

These are just examples of possible guidelines to determine a downtrend. Some traders may prefer shorter downtrends and consider securities below the 10-day EMA. Defining criteria will depend on your trading style and personal preferences.

Candlesticks provide an excellent means to identify short-term reversals, but should not be used alone. Other aspects of technical analysis can and should be incorporated to increase reversal robustness. Below are three ideas on how traditional technical analysis might be combined with candlestick analysis.

Look for bullish reversals at support levels to increase robustness. Support levels can be identified with moving averages, previous reaction lows, trend lines or Fibonacci retracements.

Use oscillators to confirm improving momentum with bullish reversals. Positive divergences in MACD, PPO, Stochastics, RSI, StochRSI or Williams %R would indicate improving momentum and increase the robustness behind a bullish reversal pattern.

Money Flows use volume-based indicators to access buying and selling pressure. On Balance Volume (OBV), Chaikin Money Flow (CMF) and the Accumulation/Distribution Line can be used in conjunction with candlesticks. Strength in any of these would increase the robustness of a reversal.

For those that want to take it one step further, all three aspects could be combined for the ultimate signal. Look for bullish candlestick reversal in securities trading near support with positive divergences and signs of buying pressure.

A number of signals came together for IBM in early October. After a steep decline since August, the stock formed a bullish engulfing pattern (red oval), which was confirmed three days later with a strong advance. The 10-day Slow Stochastic Oscillator formed a positive divergence and moved above its trigger line just before the stock advanced. Although not in the green yet, CMF showed constant improvement and moved into positive territory a week later.

The bullish engulfing pattern consists of two candlesticks, the first black and the second white. The size of the black candlestick is not that important, but it should not be a doji which would be relatively easy to engulf. The second should be a long white candlestick – the bigger it is, the more bullish. The white body must totally engulf the body of the first black candlestick. Ideally, though not necessarily, the white body would engulf the shadows as well. Although shadows are permitted, they are usually small or nonexistent on both candlesticks.

After a decline, the second white candlestick begins to form when selling pressure causes the security to open below the previous close. Buyers step in after the open and push prices above the previous open for a strong finish and potential short-term reversal. Generally, the larger the white candlestick and the greater the engulfing, the more bullish the reversal. Further strength is required to provide bullish confirmation of this reversal pattern.

In Jan-00, Sun Microsystems (SUNW) formed a pair of bullish engulfing patterns that foreshadowed two significant advances. The first formed in early January after a sharp decline that took the stock well below its 20-day exponential moving average (EMA). An immediate gap up confirmed the pattern as bullish and the stock raced ahead to the mid-forties. After correcting to support, the second bullish engulfing pattern formed in late January. The stock declined below its 20-day EMA and found support from its earlier gap up. This also marked a 2/3 correction of the prior advance. A bullish engulfing pattern formed and was confirmed the next day with a strong follow-up advance.

Note: The Bullish Engulfing candlestick pattern is similar to the outside reversal chart pattern, but does not require the entire range (high and low) to be engulfed, just the open and close.

The piercing pattern is made up of two candlesticks, the first black and the second white. Both candlesticks should have fairly large bodies and the shadows are usually, but not necessarily, small or nonexistent. The white candlestick must open below the previous close and close above the midpoint of the black candlestick's body. A close below the midpoint might qualify as a reversal, but would not be considered as bullish.

Just as with the bullish engulfing pattern, selling pressure forces the security to open below the previous close, indicating that sellers still have the upper hand on the open. However, buyers step in after the open to push the security higher and it closes above the midpoint of the previous black candlestick's body. Further strength is required to provide bullish confirmation of this reversal pattern.

In late March and early April 2000, Ciena (CIEN) declined from above 80 to around 40. The stock first touched 40 in early April with a long lower shadow. After a bounce, the stock tested support around 40 again in mid-April and formed a piercing pattern. The piercing pattern was confirmed the very next day with a strong advance above 50. Even though there was a setback after confirmation, the stock remained above support and advanced above 70. Also notice the morning doji star in late May.

The bullish harami is made up of two candlesticks. The first has a large body and the second a small body that is totally encompassed by the first. There are four possible combinations: white/white, white/black, black/white and black/black. Whether they are bullish reversal or bearish reversal patterns, all harami look the same. Their bullish or bearish nature depends on the preceding trend. Harami are considered potential bullish reversals after a decline and potential bearish reversals after an advance. No matter what the color of the first candlestick, the smaller the body of the second candlestick is, the more likely the reversal. If the small candlestick is a doji, the chances of a reversal increase.

In his book Beyond Candlesticks, Steve Nison asserts that any combination of colors can form a harami, but that the most bullish are those that form with a white/black or white/white combination. Because the first candlestick has a large body, it implies that the bullish reversal pattern would be stronger if this body were white. The long white candlestick shows a sudden and sustained resurgence of buying pressure. The small candlestick afterwards indicates consolidation. White/white and white/black bullish harami are likely to occur less often than black/black or black/white.

After a decline, a black/black or black/white combination can still be regarded as a bullish harami. The first long black candlestick signals that significant selling pressure remains and could indicate capitulation. The small candlestick immediately following forms with a gap up on the open, indicating a sudden increase in buying pressure and potential reversal.

Micromuse (MUSE) declined to the mid-sixties in Apr-00 and began to trade in a range bound by 33 and 50 over the next few weeks. After a 6-day decline back to support in late May, a bullish harami (red oval) formed. The first day formed a long white candlestick, and the second a small black candlestick that could be classified as a doji. The next day's advance provided bullish confirmation and the stock subsequently rose to around 75.

The hammer is made up of one candlestick, white or black, with a small body, long lower shadow and small or nonexistent upper shadow. The size of the lower shadow should be a least twice the length of the body and the high/low range should be relatively large. Large is a relative term and the high/low range should be large relative to range over the last 10-20 days.

After a decline, the hammer's intraday low indicates that selling pressure remains. However, the strong close shows that buyers are starting to become active again. Further strength is required to provide bullish confirmation of this reversal pattern.

Nike (NKE) declined from the low fifties to the mid-thirties before starting to find support in late February. After a small reaction rally, the stock declined back to support in mid-March and formed a hammer. Bullish confirmation came two days later with a sharp advance.

The morning star consists of three candlesticks:

The black candlestick confirms that the decline remains in force and selling dominates. When the second candlestick gaps down, it provides further evidence of selling pressure. However, the decline ceases or slows significantly after the gap and a small candlestick forms. The small candlestick indicates indecision and a possible reversal of trend. If the small candlestick is a doji, the chances of a reversal increase. The third long white candlestick provides bullish confirmation of the reversal.

After declining from above 180 to below 120, Broadcom (BRCM) formed a morning doji star and subsequently advanced above 160 in the next three days. These are strong reversal patterns and do not require further bullish confirmation, beyond the long white candlestick on the third day. After the advance above 160, a two-week pullback followed and the stock formed a piecing pattern (red arrow) that was confirmed with a large gap up.

The bullish abandoned baby resembles the morning doji star and also consists of three candlesticks:

The main difference between the morning doji star and the bullish abandoned baby are the gaps on either side of the doji. The first gap down signals that selling pressure remains strong. However, selling pressure eases and the security closes at or near the open, creating a doji. Following the doji, the gap up and long white candlestick indicate strong buying pressure and the reversal is complete. Further bullish confirmation is not required.

In April, Genzyme (GENZ) declined below its 20-day EMA and began to find support in the low thirties. The stock began forming a base as early as 17-Apr, but a discernible reversal pattern failed to emerge until the end of May. The bullish abandoned baby formed with a long black candlestick, doji, and long white candlestick. The gaps on either side of the doji reinforced the bullish reversal.

Bullish Reversal Candle Arrangements

Bullish reversal candlestick patterns can help identifying an end to a downtrend. There are a number of candlestick patterns that can help you identify a bullish reversal. Here is a list with a brief description.

Bullish Reversal Candle Arrangements List

Morning Star is a name of a bullish reversal candlestick pattern used in technical analysis when trading.

Number of candles involved: 3.

This pattern contains a long bearish candle, a Doji candle (or a spinning top), followed by a bright long bullish candle. If you look closely, the combination of the Doji cand;e and the Bullish candle looks like Venus and Jupiter early in the morning. It also resembles the transition from the dark night (the darker bearish candle) to a bright day (the brightly colored bullish candle) through the morning star (the doji candle).

The first candle is a relatively long bearish candle that forms in the same direction as the prevailing downtrend. The middle candle can be either a doji or a spinning top, signaling indecisiveness in the market. The last candle is a relatively long bullish candle. This signals that the indecisiveness of the previous period has been resolved and that a reversal to the upside is under way.

A bullish engulfing candle pattern is made up of two candles. The first candle is short and bearish, and the second one is long and bullish—long enough to be able to completely cover, swallow, or “engulf” the entire previous candle!

Bullish reversal candlestick patterns – Bullish Engulfing

T he shadows of the candles are fairly short, if they have any at all. Bullish engulfing patterns form during a decline or a downtrend, or where there is potential resistance. They signal that the market trend may reverse into an uptrend.

Don’t forget to wait for confirmation of the bullish engulfing pattern before you jump into making a trade! As with most patterns, price action prior to and immediately after the bullish engulfing pattern needs to be analyzed for a confirmation of the uptrend.

A hammer is a bullish reversal pattern that happens during a downtrend. It kind of looks like a hammer that is trying to hammer out a bottom on the chart, and it signals that the price will start rising soon.

The long lower shadow indicates that the forex puppet masters tried testing lower prices, but didn’t succeed. So the price closed near the open, and that is why the body of the hammer is so short.

Here is another Japanese word for you! You are going to love this one, though you may not be able to use it during your trip to Japan. Harami is an ancient Japanese word that means “the belly of a pregnant woman.”

Now let’s take a look at a bullish harami candle pattern.

It could be named harami because the two candles arranged next to each other resemble the belly of a pregnant woman.

To be honest with you, this could be just the reverse of a bullish engulfing pattern, but it’s good to have different ways of visualizing different patterns, as this will ultimately help us remember the patterns and identify them more easily.

So basically, a bullish harami pattern consists of a long bearish candle (the close price is lower than the open price) followed by a short bullish candle (the close price is slightly higher than the open price.)

Because the bullish harami indicates that the falling trend may be reversing, it signals that this may be a good time to open a “buy” position—that is, after you have confirmed the pattern and also consulted other points of the IDDA.

On your free demo account, set your chart to the “Candlestick” pattern and set the time frame to “daily.” Go through different currency pairs and look for bullish reversal patterns. After you find one, try to confirm that it is in fact a bullish reversal indication by analyzing the chart pattern.

Do you see a double bottom, a head and shoulders bottom, or any other bullish reversal chart pattern at the place where you discovered your bullish reversal candle pattern?

If yes, place a “buy” position, wait a couple of days and see where the markets go. Was your analysis correct? Was the pattern that you identified confirmed? If yes, how many (fake) pips did you earn?

Bullish Reversal Candlestick Patterns

The Bullish Reversal Candlestick Pattern has over 14 different pattern styles. These include the Bullish Engulfing, the Piercing Pattern, the Harami, the Hammer, the Inverted Hammer, the Morning Star, and the Abandoned Baby. To use Bullish Reversal Candlestick Patterns succesfully, look for the pattern in a downtrend and use Bullish Confirmation to validate your analysis. Further reinforce your results by using additional analysis to confirm the patterns.

*Bullish Engulfing Pattern

The Bearish Reversal Candlestick Pattern comes in over 12 different forms. These include the Abandoned.

While a Wedge pattern is most often known as a Reversal Pattern (a chart pattern where the trend of a stock.

If you’re looking for additional reading to supplement your forex trading education, you’ve come to the.

A reversal pattern that can be bearish or bullish depending upon whether it appears at the end of an.

There are many different styles of trading that may be used in Foreign Exchange trading. Forex styles do.

Updated: The Happy Hunter Price Action System (Trailing Variant)

Greetings, ladies and gents! As promised, here are the updated rules for the The Happy Hunter Price Action System (Trailing Variant).

The Happy Hunter Price Action System (Trailing Variant)

If you’re wondering, you’re not seeing double and this is not a duplicate post. You see, I finally completed my prototype trading system, but I happen to have two variants. This one is the Trailing Variant patterned after Version 2.2.

The Happy Hunter Price Action System (Fixed TP Variant)

If you’re wondering, you’re not seeing double and this is not a duplicate post. You see, I finally completed my prototype trading system, but I happen to have two variants. This one is the Fixed TP Variant patterned after Version 2.1.

Updated: The Happy Hunter Price Action System (Fixed TP Variant)

Greetings, ladies and gents! As promised, here are the updated rules for the The Happy Hunter Price Action System (Fixed TP Variant).

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