Bullish Candlestick Patterns: Meaning and Types

Candlestick patterns are an important part of technical analysis. In the last chapter, we learned what candlesticks are and how they are used to understand the performance of a particular stock. In this chapter, we will take you through the different bullish candlestick patterns and how to interpret them. 

If you are new to stock trading and are struggling to understand candlestick patterns, the only way to learn to read them is by entering and exiting trades with a small amount. However, it is important to understand that you cannot use these patterns in isolation. You can use them along with other forms of technical analysis to make better investment decisions. 

Let’s look at some of the most important bullish candlestick patterns. 

• Single Candlestick Bullish Patterns 

Bullish candlestick patterns can be found at the end of a market downtrend or whenever there is a price reversal. These patterns also act as indicators for investors to open a long position and reap the returns of the upward trend in the market. 

If you want to invest in the stock market, you must know about a few single-candlestick bullish patterns. Let’s examine these patterns in detail. 

• Hammer

As the name suggests, a hammer candlestick looks exactly like a hammer. Here, the body of the candle is short, and the lower wick is quite long. This candle forms when the security is traded at a price lower than its opening price. While the body of the candle shows the difference in the opening and closing prices, the wick shows the period of highs and lows. 

This candlestick pattern is an indication of the price coming back up to a certain level even after experiencing selling pressure during the day. While hammers can be both green or red, a green hammer indicates a strong bullish trend. 

• Two-Candlestick Bullish Reversal Patterns 

Now that you know how to spot a single candlestick pattern, you should also know about dual candlestick patterns. In these cases, two candlesticks together form a pattern. Let’s have a look at some popular two-candlestick bullish reversal patterns. 

• Bullish Engulfing

Another important candlestick that you must know about is the bullish engulfing. Here, the pattern is formed using two candlesticks. The first candle is red and has a shorter body, and it is being engulfed by a larger green candle. 

You will spot the pattern at the bottom of a downward trend. This candlestick indicates an increase in buying pressure on the stock. Investors see a bullish engulfing as an indicator of price reversal - a situation where more investors buy the stock, bringing the prices up. 

In this case, while the market opens at a lower price than before due to a bullish trend, the prices go up, making it a win-win situation for the buyers. 

• Piercing Pattern

Like a bullish engulfing, a piercing pattern uses two candlesticks. It is formed by a long red candle followed by a long green candle. In this pattern, there is a significant difference between the closing price of the first candle and the opening price of the second one. 

This pattern indicates strong buying pressure as the stock's price goes up to or beyond the last day’s midday price. In a piercing pattern, both candles have a long body. 

• Bullish Harami

The bullish harami pattern is a very popular indicator of a bullish reversal pattern. Unlike the bullish engulfing pattern, the green candlestick that follows the red one is shorter. Here, the first red candle is bearish, showing a bullish market trend. However, the short green candle acts as a saving grace for the buyers as it indicates the return of a bullish trend. 

The green candle is shorter, and it falls within the range of the red candle. If the green candle goes beyond the size of the red one, it is not a bullish harami pattern. Investors are advised not to look at a bullish harami in isolation as it can be misleading. You must make use of other tools like market structure and oscillators before investing in this case. 

• Three-Candlestick Bullish Continuation Pattern 

To spot a bullish continuation pattern, you need to look for three candlesticks together. These candlesticks create formations that help traders identify the price trend. 

While there are some three-candlestick reversal patterns, most of the three-stick patterns are continuous. Let’s have a look at these patterns. 

• Morning Star

As the name suggests, a morning star is a ray of hope in a gloomy market. It is a three-candlestick pattern in which a short-bodied candle is sandwiched between a long red candle and a long red candle. 

The middle candle will have little or no overlap with the two larger-bodied candles. The candlestick pattern can be spotted where there is selling pressure, but it subsides, and a bull market is about to begin. In this pattern, the first candle is bearish, the middle one is a Doji, and the third one is bullish. The second candle indicates confusion in terms of the trend. 

• Three White Soldiers

The three white soldiers pattern is a three-candlestick pattern. You can spot it at the bottom of a downward trend. This pattern shows a strong bullish trend as it comprises three green candles. These candles can be formed due to high buying pressure, indicating a strong trend reversal. 

These bullish green candles have larger bodies and very short wicks. The pattern occurs over three days and showcases a progressive trend, as these candles open and close at a higher price than the previous day.

• Bullish Candlestick Patterns in Trends

As an investor, you will come across several bullish candlestick patterns while trading on the stock market. These patterns will help you forecast price movements and improve the returns on your investments.  

You will spot these candlestick patterns mostly at the beginning of an upward trend. They also signify the losing momentum of a downward trend. 

Trading Strategies with Bullish Candlestick Patterns

Now that we are aware of different bullish candlestick patterns, let’s have a look at the strategies that can help you better when you spot a bullish candlestick pattern. 

• The Hammer:

The hammer is formed because of a strong buying pressure, leading the stock to close at a high price. However, before you decide to invest in a stock based on the hammer, try to observe the upward trend closely for a couple of days before investing. Also, look for a rise in the trading volume before you jump into the investment. 

• The Bullish Engulfing:

Here, the buying pressure leads to an upward movement of the price. If the price moves higher than the high of the second engulfing candle, it is advised to enter a long position. This is because such a movement is an indicator of a downtrend reversal. 

• The Three White Soldiers:

While the candles show a progressive trend, investors need to trade carefully when they spot the three white soldiers. In some cases, the white candles appear to be long, and the short sellers can negatively contribute to the stock's price. 

Conclusion

While it is important to understand the use of candlestick patterns, you cannot use them in isolation. You will have to use them along with other technical analysis tools. Bullish candlesticks are a signal of buying opportunities. However, there are several factors that you must consider before you buy a particular stock. 

You need to confirm the reversal of a downward trend before you initiate a trade. Now that we are aware of the different bullish candlesticks, in the next chapter, we will take you through the bearish candlestick patterns and the impact they can have on your investment decisions.