Use the bullish candlestick pattern to buy stocks

A candlestick chart is a financial chart used to track the trend of securities. They originated from the centuries-old Japanese rice trade and have entered modern price charts. Some investors find them more visually appealing than standard bar charts, and price movements are easier to interpret.

The candlestick is so named because the rectangles and lines at the ends resemble a candle with a wick. Each candlestick usually represents a day’s stock price data. Over time, candlesticks are combined into recognizable patterns that investors can use to make buying and selling decisions.

Key points

  • The candlestick chart is useful for technical day traders to identify patterns and make trading decisions.
  • A bullish candlestick indicates the entry point for long trades and can help predict when a downtrend will turn up.
  • Here, we reviewed a few examples of bullish candlestick patterns that need attention.

Click play to learn how to buy stocks using the bullish candlestick pattern

How to read a single candlestick

Each candlestick represents the price data of a stock for one day through four pieces of information: opening price, closing price, highest price and lowest price. The color of the central rectangle (called the entity) tells the investor whether the opening price or the closing price is higher. A black or solid candlestick indicates that the closing price of the period is lower than the opening price; therefore, it is bearish and indicates selling pressure. At the same time, a white or hollow candlestick means that the closing price is higher than the opening price. This is bullish and shows buying pressure. The lines at both ends of the candlestick are called shadows, and they show the entire range of price action for the day, from low to high. The upper shadow line shows the highest price of the stock for the day, and the lower shadow line shows the lowest price of the day.

Bullish candlestick pattern

Over time, the daily candlestick groups will become recognizable patterns with descriptive names, such as three white soldiers, dark cloud cover, hammer, morning star, and abandoned infant, to name a few. The pattern is formed within 1 to 4 weeks and is a valuable resource for understanding the future price trend of stocks. Before we delve into a single bullish candlestick pattern, please note the following two principles:

  1. The bullish reversal pattern should Formed in a downward trendOtherwise, it is not a bullish pattern, but a continuation pattern.
  2. Most bullish reversal patterns require Bullish confirmation. In other words, they must be accompanied by an increase in price, which may be a long hollow candlestick or an upward gap, accompanied by high trading volume. This confirmation should be observed within three days of the model.

Other traditional technical analysis methods (such as trend lines, momentum, oscillators or volume indicators) can be used to further confirm the bullish reversal pattern to reiterate buying pressure. There are many candlestick patterns that indicate buying opportunities. We will focus on the five bullish candlestick patterns that give the strongest reversal signals.

1. a hammer or an inverted hammer

The hammer line is a bullish reversal pattern that indicates that the stock is approaching the bottom in a downtrend. The body of the candle is shorter and the lower shadow is longer. This is a sign that sellers are pushing down prices during the trading hours, followed by strong buying pressure and ending the transaction with a higher closing price. However, before we start a bullish reversal, we must pay close attention to the next few days to confirm the uptrend. The reversal must also be verified by an increase in transaction volume.

An inverted hammer is also formed in a downtrend, representing a possible trend reversal or support. Except for the longer upper shadow, it is the same as the hammer line, which indicates that there is buying pressure after the opening price, followed by considerable selling pressure, but this is not enough to make the price fall below the opening price. Similarly, the bullishness needs to be confirmed, which can appear in the form of long hollow candlesticks or gaps, accompanied by a large amount of trading volume.

2. Bullish engulfing

The bullish engulfing pattern is a reversal pattern of two candles. The second candle completely “engulfed” the body of the first candle, regardless of the length of the tail shadow. The bullish engulfing pattern appears in a downtrend and consists of a combination of a dark candle and a larger hollow candle. On the second day of the pattern, the price opened lower than the previous low, but buying pressure pushed the price higher than the previous high, and the buyer clearly won. It is recommended to establish a long position when the price is above the high of the second engulfing candle-in other words, when a downtrend reversal is confirmed.

3. Piercing line

Similar to the engulfing pattern, the piercing line is a two-candle bullish reversal pattern that also appears in a downtrend. After the first long black candle is a white candle whose opening price is lower than the previous closing price. Soon thereafter, buying pressure pushed the price up by half or more (preferably two-thirds) into the entity of the black candle.

4. Morningstar

As the name suggests, Morningstar is a sign of hope and a new starting point in a gloomy downtrend. This pattern consists of three candles: a short candle (called a doji or spinning top) is between the previous long black candle and the next long white candle. The entity color of the short candle can be white or black, and its entity does not overlap with the entity of the previous black candle. This shows that the selling pressure that existed the day before is now fading. The third white candle overlaps the body of the black candle, showing the beginning of new buyer pressure and a bullish reversal, especially when volume increases.

5. Three White Soldiers

This pattern is usually observed after a period of downtrend or price consolidation. It consists of three long white candles, which gradually closed higher in each subsequent trading day. The opening price of each candle is higher than the previous opening price, and the closing price is close to the high of the day, indicating a steady increase in buying pressure. When the white candle looks too long, investors should proceed with caution, as this may attract short sellers and further push down the stock price.

Put it together

The Enbridge, Inc. (ENB) chart below shows the three bullish reversal patterns discussed above: inverted hammer, pierced line, and hammer.

The chart from Pacific DataVision, Inc. (PDVW) shows the pattern of three white soldiers. Note how the reversal of the downtrend is confirmed by a sharp increase in trading volume.

Bottom line

Investors should use candlestick charts like any other technical analysis tool (that is, to study the psychology of market participants in the context of stock trading). They provide an additional layer of analysis on top of the fundamental analysis that forms the basis of trading decisions.

We studied five more popular candlestick chart patterns, which indicate buying opportunities. They can help identify changes in trader’s mood where buyer pressure exceeds seller pressure. The reversal of this downward trend may be accompanied by the potential for long-term gains. In other words, the model itself does not guarantee that the trend will reverse. Before starting a transaction, investors should always confirm the reversal through subsequent price movements.

Although there are some ways to predict the market, technical analysis is not always a perfect indicator of performance. Either way, to invest, you will need a broker account. You can check InvestingClue’s list of the best online stock brokers to learn about the best options in the industry.

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