Candlestick charts are a sort of financial chart used to follow the movement of stocks. They originated in the centuries-old Japanese rice trade and have now found their way into current price graphing. Some investors prefer them over traditional bar charts because they are more aesthetically pleasing and the price movements are simpler to comprehend.
Candlesticks get their name from the rectangular form and lines on each end, which resemble a candle with wicks. Each candlestick typically represents one day’s worth of stock price data. The candlesticks form recognized patterns over time, which investors may utilize to make buying and selling choices.
- Candlestick charts are important for technical day traders to recognize patterns and make trading choices.
- Bullish candlesticks offer entry locations for long trades, and may assist identify when a downturn is going to turn around to the upside.
- Here, we go through various instances of bullish candlestick patterns to watch out for.
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How to Read a Single Candlestick
Each candlestick symbolizes one day’s worth of price data for a stock by displaying four pieces of information: the beginning price, closing price, high price, and low price. The hue of the middle rectangle (known as the actual body) indicates whether the opening or closing price was greater. A black or full candlestick shows that the closing price for the period was less than the beginning price, indicating bearishness and selling pressure. A white or hollow candlestick, on the other hand, indicates that the closing price was higher than the beginning price. This is positive and indicates that purchasing pressure is present. Shadows are the lines at both ends of a candlestick that indicate the complete range of price activity for the day, from low to high. The higher shadow represents the stock’s highest price for the day, while the lower shadow represents the stock’s lowest price for the day.
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Bullish Candlestick Patterns
Over time, groupings of daily candlesticks form identifiable patterns and are given descriptive names such as three white soldiers, black cloud cover, hammer, morning star, and abandoned infant, to mention a few. Patterns emerge over one to four weeks and provide crucial insight into a stock’s future price behavior. Before delving into particular bullish candlestick patterns, keep the following two rules in mind:
- Within a downturn, bullish reversal patterns should appear. Otherwise, it is a continuation pattern rather than a bullish pattern.
- The majority of bullish reversal patterns need bullish confirmation. In other words, they must be followed by an upward price rise, which may take the form of a lengthy hollow candlestick or a gap up, as well as significant trading volume. Within three days following the pattern, this confirmation should be detected.
To reinforce purchasing pressure, the bullish reversal patterns may be validated using additional standard technical analysis tools like as trend lines, momentum, oscillators, or volume indicators. There are several candlestick patterns that suggest a buying opportunity. We will concentrate on five bullish candlestick patterns that provide the most powerful reversal indication.
1. The Hammer or the Inverted Hammer
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The Hammer is a bullish reversal pattern that indicates a stock is reaching the bottom of a downtrend. The candle body is short with a longer lower shadow, indicating that sellers drove prices down throughout the trading session, only to be followed by strong buying pressure to conclude the session on a higher close. However, before we join in on the bullish reversal action, we must confirm the rising trend by keeping a careful eye on it over the following several days. The reversal must also be verified by an increase in trade volume.
Image by Julie Bang © Investopedia2021
In a downtrend, the Inverted Hammer signals a potential trend reversal or support. The only difference between it and the Hammer is the longer upper shadow, which shows purchasing pressure after the opening price, followed by significant selling pressure, but not enough to send the price down below its initial value. Again, bullish confirmation is necessary, which might take the shape of a lengthy hollow candlestick or a gap up accompanied by high trading volume.
2.The Bullish Engulfing
A two-candle reversal pattern, the Bullish Engulfing pattern. The second candle entirely engulfs the first candle’s genuine body, regardless of the length of the tail shadows. In a downtrend, the Bullish Engulfing pattern shows as a combination of one dark candle followed by a bigger hollow candle. The price begins lower than the previous low on the second day of the pattern, but buying pressure propels it up to a greater level than the previous high, resulting in a clear victory for the purchasers. It is best to initiate a long position when the price climbs higher than the high of the second engulfing candle, indicating that the downtrend has been confirmed.
3. The Piercing Line
The Piercing Line, like the engulfing pattern, is a two-candle bullish reversal pattern that occurs in downtrends. Following the first lengthy black candle comes a white candle that opens lower than the previous close. Soon after, the price rises halfway or more (ideally two-thirds of the way) into the genuine body of the black candle.
4. The Morning Star
The Morning Star, as the name suggests, is a harbinger of optimism and a fresh beginning in a bleak downturn. The design is made up of three candles: one short-bodied candle (called an adojior a spinning top) between a preceding long black candle and a following long white candle. The short candle’s genuine body may be white or black, and there is no overlap between its body and that of the black candle preceding it. It indicates that the selling pressure that existed the day before has now subsided. The third white candle overlaps the body of the black candle, indicating fresh buyer pressure and the beginning of a bullish reversal, particularly if reinforced by larger volume.
5. The Three White Soldiers
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This pattern is frequently seen following a decline or during a period of price consolidation. It is made out of three lengthy white candles that close higher on each successive trading day. Each candle starts higher than the previous one and closes around the day’s high, indicating a continuous increase in purchasing pressure. When white candles seem to be overly lengthy, investors should be cautious since this may attract short sellers and drive the stock price further down.
Putting it All Together
The chart below for Enbridge, Inc. (ENB) demonstrates three of the bullish reversal patterns outlined above: the Inverted Hammer, the Piercing Line, and the Hammer.
The chart for Pacific DataVision, Inc. (PDVW) illustrates the Three White Soldiers pattern. Take note of how the rapid spike in trade volume confirms the reversal of the downtrend.
The Bottom Line
Investors should utilize candlestick charts like any other technical analysis tool (i.e., to analyze the psychology of market participants in the context of stock trading) (i.e., to study the psychology of market participants in the context of stock trading).They give an additional layer of analysis on top of the basic analysis that provides the foundation for trading choices.
We looked at five of the most common candlestick chart patterns that suggest purchasing opportunities. They may assist spot a shift in trader attitude when purchase pressure outweighs selling pressure. Such a downtrend reversal might be followed with a possibility for extended gains. That said, the patterns alone do not ensure that the trend will reverse. Investors should always validate reversal by the ensuing price movement before making a transaction.
While there are certain approaches to anticipate markets, technical analysis is not always a precise prediction of success. Either way, to invest you’ll need a broker account. You may check out Investopedia’s list of the best online stock brokers to get an idea of the top alternatives in the field.
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