Candlestick patterns are a relatively rare technical analysis tool. It has been used by merchants for over 200 years and is still extremely popular. Today, most stock, crypto, and Forex traders incorporate it into their working routines. The range of patterns has increased a lot during the last decades. If you combine them with other indicators and oscillators, you’ll get a powerful price prediction instrument.
Trend is your friend. This proverb is well-known by the majority of traders. We either continue earning money on a strong upside or downside movement or skillfully enter the market when a price curve reverses. The following bullish patterns will help you to determine a favorable moment for opening the order. They indicate that a bearish trend will turn up and that bulls rule the roost.
Bullish Pattern: What is it?
Every trading program represents price movements with a sequence of candlesticks. Every candle consists of a body that indicates open a close price and two wicks that show highs and lows. This kind of representation gives much more information on market behavior than a simple curve. For example, certain combinations of candles can give clear predictions of the future price. Even if you don’t have much experience in trading, you can get a full analysis and professional advice from the best Forex robots.
These combinations are called patterns. Bullish patterns anticipate a continuation of an uptrend or a reversal of a downtrend. They may consist of one, two, three, and, rarely, more candles. They typically have a white or green color, depending on the trading program you use. The size of bodies and wicks may greatly vary.
Books about Forex technical analysis explain dozens of these patterns. All of them have different levels of reliability. Remembering all of them is a good deal, but it is not as necessary as remembering the main ones. Below, you'll encounter the six most common patterns that every trader should know.
Why Bullish Candlestick Patterns Matter
Bullish candle patterns are a precious tool in the hands of experienced traders. Moreover, they can become a starting point for Forex newbies. It is almost impossible to imagine a successful trader who doesn’t incorporate bullish reversal candles or bullish trend patterns into their strategies. Here is why they matter:
- A powerful signal to enter a long position. Bullish patterns can signify that buyers take over and the price will grow.
- A sign for a stop-loss level. Many traders consider bullish reversal patterns as reliable signals for setting a stop-loss order.
- A reversal sign. There can be very straightforward signals that sellers’ pressure is about to end and that buyers seize the initiative.
Overall, Japanese candles give an understanding of what is bullish reversal and what is generally happening on the market. If you have a trend-following strategy, bullish candlestick patterns will be truly helpful for you.
Most Common Bullish Candlestick Patterns
As we mentioned before, there are dozens of bullish patterns and their modifications. For example, Harami and Harami Cross can be classified as different patterns but have similar meanings and just slightly differ in shape. The following six combinations cover the majority of bullish patterns you can see on price charts.
Bullish Engulfing Pattern
Engulfing patterns suggest the end of a trend. There can be bearish and bullish types. A bullish pattern occurs at the bottom of the downtrend. It consists of two candles. The first bearish candle is smaller than the following one. The second candlestick is bullish (usually green or white). It is significantly bigger so that it engulfs the first bearish candle.
The big bullish candle appears because bulls start actively buying an asset, and their pressure causes a change of trend. The reliability of this bullish candle pattern depends on the market volume and other uptrend indicators. In general, you can confidently take it into account if you have a reversal strategy.
Hammer & Inverted Hammer
Hammer and Inverted Hammer are the most notable candlesticks on the chart. They are often encountered together, and both shapes indicate the same tendency — a bullish reversal. The hammer has a small body and a long lower shadow. Conversely, the inverted hammer has a long wick on the top and a small lower body.
Their appearance often signals that the downtrend has lost its strength and buyers have regained control. Even though these two figures have opposite directions, they have the same meaning. The long shadow of the first hammer shows the inability of bears to move prices even lower. Interestingly, the small body of an inverted hammer is also a signal of reducing the sellers’ pressure.
The morning star is a very notable and accurate 3-candle pattern. It has two big-sized candlesticks on the sides and one small between them. The first candle is usually a bearish one. It represents the end of a downtrend. The small middle candle can be either red (black) or green (white). It signifies that the sellers’ pressure is reduced. And the last bullish reversal candle indicates the new trend. The pattern literally shows the smooth transition from one direction to another.
Three White Soldiers
The three white soldiers can appear both after the end of a bearish trend or on the uptrend. The second case indicates that buyers’ momentum is still strong and that you observe one of the bullish continuation candlestick patterns.
The pattern looks like three bullish candles, one after another. The opening of the next candlestick is higher than the corresponding part of the previous one.
The pattern itself can be used as an additional instrument for determining price movement. You can use it in conjunction with Parabolic SAR, Fibonacci levels, or similar tools for better precision.
The piercing line pattern doesn’t have as distinctive a shape as previous examples. It consists of a bearish and a bullish candle in line. The second candle opens lower than the previous candle closes. It signifies a bullish reversal. It is worth noting that both candles should be of medium or large size. When you notice this pattern, the bearish curve will likely go up.
The bullish harami is similar to a bullish engulfing pattern, but it has opposite candle sizes. The first candle is bigger than the second one. However, the order of red and green candlesticks is the same: the pattern starts with a bearish candle and ends with a bullish one. Typically, the second candlestick fits within the body of the first one with its wicks. Sometimes, the bullish part doesn't have a body at all (a doji type). In this case, the pattern is called a harami cross. Harami often indicates the trend reversal, but it is still recommended to confirm it with other technical analysis tools.
Tips for identifying bullish candlesticks
The most obvious tip that helps to identify the bullish candlestick is its color. In the majority of trading programs, they have a white or green default color. The bullish candle consists of the low point (the lowest part of its wick), the opening price (the bottom of the body), the closing price (the top of the body), and the higher wick. Careful analysis of these parts helps to identify the type of the candle and the pattern.
The second factor to be considered is the size of the candles. For example, in engulfing or harami patterns, the sizes of nearby candles differ greatly. Their relative position also matters. So, in the three white soldiers pattern, the next candlestick should be higher than the previous one.
There are also some more complex bull candlestick patterns, consisting of three or more candles. It is recommended just to remember them and pay attention to the shapes you know. Last but not least: a bearish trend means that at some moment, the curve will change its direction. Look at the candles and check different timeframes. Most probably, you’ll notice some of the bullish patterns mentioned above.
Risks and Limitations of Bullish Candlestick Patterns
Every bullish pattern can be a valuable tool for catching a trend reversal or continuation. However, they shouldn't be considered errorless means of price prediction. Every tool must be applied carefully with an awareness of existing risks. To get the most out of patterns, keep in mind these points:
- A pattern that predicts an uptrend may fail due to market volatility or sudden economic events. To minimize this risk, check volatility indicators and consider the risk level you can tolerate.
- A bullish candlestick pattern can be weak due to low market volume and, therefore, fail to materialize.
- While the pattern shows a bullish trend, there can be other strong factors and indicators that don’t confirm the pattern’s forecast.
In general, it is important to remember that patterns are just one more useful tool for increasing your profits. Bear in mind the market context and other indicators and develop a strategy that raises your odds.
Strategies for Leveraging Bullish Candlestick Patterns
In the previous sections, we stated that when trading with bullish patterns, risks must be considered carefully. Bullish reversal candlesticks can’t be the basis of your strategy — they are only its part. To make your trading plan holistic and successful, you may enrich it with the following tricks:
- Before you enter the trade, wait for confirmation. Make sure that a new pattern has appeared.
- Use as many technical analysis indicators as you can. Set your software to see the most significant parameters like MACD, moving average, Parabolic SAR, etc.
- The length of the wicks and the size of the body matter. For example, the wick of a hammer should be approximately five times more than a body. Otherwise, the pattern can give a false signal.
- The more you trade, the better understanding of patterns you get. Develop your strategy all the time and learn the nuances of different bullish reversal candlestick formations.
The Bottom Line
On every timeframe, you will see bullish and bearish candlestick patterns. Understanding candlestick patterns won't open the door to unlimited money sources but can significantly improve your trading strategy. If you combine attentive observations, careful analysis, and a set of other indicators, you'll increase your efficiency greatly. The most common bullish reversal candlestick patterns will help you to determine the turn moments and the periods when the uptrend is strong and reliable.