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. 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: 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.
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. Before we delve into individual bullish candlestick patterns, note the following two principles:. 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.
We will focus on five bullish candlestick patterns that give the strongest reversal signal. 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. 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 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.
The pattern consists of three candles: 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.
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.
The chart below for Enbridge, Inc. ENB shows three of the bullish reversal patterns discussed above: The chart for Pacific DataVision, Inc. Note how the reversal in downtrend is confirmed by the sharp increase in the trading volume. Investors should use candlestick charts like any other technical analysis tool i. They provide an extra layer of analysis on top of the fundamental analysis that forms the basis for trading decisions.
We looked at five of the more popular candlestick chart patterns that signal buying opportunities. They can help identify a change in trader sentiment where buyer pressure overcomes seller pressure. Such a downtrend reversal can be accompanied by a potential for long gains. That said, the patterns themselves do not guarantee that the trend will reverse. Investors should always confirm reversal by the subsequent price action before initiating a trade. Dictionary Term Of The Day. A conflict of interest inherent in any relationship where one party is expected to Broker Reviews Find the best broker for your trading or investing needs See Reviews.
Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education. A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. 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.
Before we delve into individual bullish candlestick patterns, note the following two principles: Bullish reversal patterns should form within a downtrend. 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 Piercing Line Similar to the engulfing pattern, the Piercing Line is a two-candle bullish reversal pattern, also occurring in downtrends. The Three White Soldiers This pattern is usually observed after a period of downtrend or in price consolidation. The Bottom Line Investors should use candlestick charts like any other technical analysis tool i. No thanks, I prefer not making money.
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