As you trade, one essential technique you can use to determine the value of a stock is by attempting to analyze its movement based on the latest trend data. You can use trend analyses to identify trends such as a bull market, where stock prices rise. It can also warn you about a possible reversal, such as a bull to bear market, but what exactly is a bullish reversal?
A bullish reversal happens when a bearish market starts to flow in the opposite direction of its downward trend. Traders can take advantage of a reversal signal to determine the best times to exit a trade or trigger new trades.
This article will further help you understand how to read bullish chart patterns and explore ways you can use it to trade.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Understanding Japanese Candlesticks
There are two types of people in the stock market, those who want to buy the security and end up raising its price in the process, and those looking to sell it and thereby lowering its price in the process. Trend analysis allows you to fully understand who has the upper hand to make the right trading decisions. It would not be favorable to you to short a stock when the market is bullish. Therefore, understanding and identifying these market phases can have a significant effect on your portfolio.
A candlestick helps to display the information of an asset’s price movements in the market. It consists of an opening and closing price and the highs and lows of a single day. They are the most popular trading components that help traders make technical analyses when interpreting an asset’s price information.
A candlestick has three main features:
- The body: it represents the open to close range
- The color: determines the direction of the price in a market. Red or black color shows a price decrease, while a white or green color indicates a price increase.
- The wick: indicates the high and low points of the day
The formula is the same for every time frame chart you are viewing.
Bullish Candlestick Patterns
Bullish candlestick patterns may occur after a downward trend in the market, signaling a reversal in the price movement. As a trader, you can use the patterns to determine when to open a long position if you want to profit from the predicted upwards trajectory.
Some bullish candlestick patterns help you confirm if there is buying pressure in the market, while others predict a stronger reversal signal. Here are some of the top candlestick patterns that you should learn to read to use when trading.
The Bullish Hammer
The bullish hammer is one of the most popular candlestick patterns you can find at the bottom of a downward trend. The hammer consists of a short upper body with a long lower wick. The meaning of its name comes from its appearance.
A bullish hammer shows that even with selling pressure during the day, the price rose back up due to intense purchasing pressure. The bull market is more robust when the color of the candlestick body is green rather than red.
The Bullish Inverted Hammer
An inverted hammer is quite similar to the hammer, only with slight changes to its appearance. Instead of a long lower wick, it has a short body with a long upper wick. You can observe the bullish inverted wick in a downtrend following a black body.
The bullish hammer indicates that the selling pressure that follows a buying pressure is not strong enough to drop the market price. The bullish hammer’s extended upper wick suggests that bulls are looking to own the market by driving the price upwards.
It is common to confuse the inverted hammer with the shooting star since they bear a very similar resemblance. However, the two have very different meanings. The inverted hammer is a bullish signal that only occurs at the bottom of a downtrend. On the other hand, the shooting star is a bearish signal that appears at the top of a rising trend.
Here is a video on how to trade the inverted hammer candlestick pattern:
The Bullish Engulfing
Two candlestick patterns characterize a bullish engulfing chart pattern. The first candle is short and has a small body. Its body is entirely engulfed by the second candle that bears no regard to its tail shadow’s length. The first candle can either be red or black, while the second candle may be green or white.
Usually, the white wick may or may not have a small upper wick. It indicates that the price it closed the day with may have been its highest. When it lacks an upper wick, it makes it more likely for the next day to produce a white candlestick that closes at a much higher price than that of the bullish engulfing pattern. It is also possible for a black candlestick to appear the next day after a gap up at the opening.
A bullish engulfing pattern only occurs when an asset’s price on the second day is lower than the price it closed with on the first day. If the price does not lower down, the white candlestick may not engulf the previous day’s black candlestick body.
The Bullish Morning Star
The bullish morning star is a pattern consisting of three candlesticks. The pattern predicts a significant bottom reversal. It includes one short candlestick that follows a long black or red candlestick and gaps down to form a star. The third candlestick may either be white or green. Its closing is well into the first session’s black body.
The morning star reveals a slowing downward momentum just before a significant bullish move happens to lay the foundation of a new upward trend. It signals that the selling pressure is subsiding, and there is indecision in the market, leaving the market almost flat. The uncertainty allows a bullish move as bulls identify value at this level and prevent any further selling.
The Bullish Three White Soldiers
The bullish three white soldiers is a candlestick pattern that occurs when three long bullish candles signal a strong reversal of the current downtrend. It consists of three candles, each with an opening that is slightly lower than the previous close and closing prices that are progressively higher than the next. The candlestick bodies are long and do not have long wicks giving them a staircase appearance.
The pattern indicates a steady advance of buying pressure as bulls take over all the sessions, closing near highs. When trading, you can use the three white soldiers as an entry or exit point.
It is an entry point for traders looking to take up a bullish position and an exit point if you are short on security. Still, it would help if you were very cautious when you encounter this pattern.
Sometimes, when the candles are too long, they can attract short sellers who may further down the asset.
Bullish Piercing Line
The piercing line pattern is a bullish candlestick pattern that occurs at the bottom of a downtrend. The pattern involves two long candlesticks where the second green or white candle opens lower than the first red or black candle.
It indicates a rising buying pressure as the price rises above the mid-price of the previous day. The piercing line pattern happens within two days, where the first is influenced by sellers and the second by enthusiastic buyers.
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Conclusion
There are many risks when you are timing trades to enter the market bottoms and exit at the tops. However, it becomes easier when you understand the bullish candlestick patterns, which provides insight regarding the price information, trend signals, and warnings about reversals.
You will trade with more confidence as you may easily spot a change in the market sentiment and identify downtrend reversals with the potential for long gains. Bullish candlestick patterns help you to predict an upcoming trend reversal. However, it is not guaranteed, so always confirm the reversal by the subsequent price action before making a trade.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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