Bullish Reversal Candlestick Pattern
Here are some bullish reversal candlestick pattern. These reversal patterns can help us to spot a reversal in the trend of the stock. There are about 40 reversal candle patterns. Learning a few of these patterns will help you a long way in your investing or trading.
Some of the patterns here have already been mentioned in the bullish candlestick article. Some bullish candlestick patterns are reversals while others are continuation patterns. They are included here under the heading of bullish reversal patterns.
As mentioned, this is one of my favourite patterns. The stock opens at the top of the trading session. Throughout the day, the stock drops all the way down. However, the stock refused to stay down and closes at the top of the session.
This candlestick pattern can often be seen at the end of a downtrend. Everybody is selling the stock. There is fear and panic. Many stop losses are also hit, producing a sharp drop in the price. However, the fear and panic is over exagerrated. Thus, the stock shoots back up to close at the top of the session.
When you see this pattern on a downtrend, it signifies that the downtrend may slow down. A possible reversal may happen.
I always like to see a hammer. When you combine it with other concepts like support and resistance and chart patterns like double bottom and triple bottom, it can be a very powerful reversal sign.
Bullish Engulfing Pattern
A bullish engulfing pattern consists of two candlestick bars. The second bar completely engulfes the previous bar. The first bar is a down bar. The next day, the stock opens lower(gaps down). Everybody thinks that the stock is going to go down further.
However, the stock rises and close way above the high of the previous day. The bulls have taken control and eliminated the bears. Thus, the stock may be ready to go up again.
There are a few important factors that we can look at that will enhance the signal of this candlestick pattern. Firstly, observe the gap down on the engulfing day. The further the gap down is from the close of the first day, the more likely it is that a strong reversal will occur.
If the first day consists of a very small body or a doji, it signals that although the stock is in a downtrend, the downward momentum is slowing down. In other words if there is a large green body on the second day which engulfes a small body, the signal is stronger. The prior trend is running out of momentum. Furthermore, if the large green body engulfes more than one small body, the probability of a reversal is higher.
Heavy volume on the engulfing day also increases the odds that the reversal is genuine. An engulfing pattern that occurs after a fast down move will have less supply to overcome.
As with most candlestick patterns, it is good to wait for a confirmation the next day. The confirmation could be another green bar, a gap up or a higher close the next day.
According to Steve Nison, Harami means 'pregnant' in Japanese. This may look like the bullish engulfing pattern. But, what happens here is that the previous day's candle completely engulfes the subsequent day's candle. Just like its name, this patterns looks like a pregnant woman with her baby.
On the previous day, you see a nasty wide range down bar. Everybody is suffering and thinks that the stock may go down again tommorow.
On the next day, the stock opened above the previous day's close. We call that a gap up. Instead of going down, the stock went up. So, everybody is surprised. They start to think 'well, things may not look that bad after all'.
When you see that happening, it signals that the bulls may be starting to take control. There is a possibility that the stock might move up from there.
The formation of this pattern does not mean that the stock will rally. Usually, the stock will be in a congestion phase after this pattern occurs.
There are a few factors that we can look at which will enhance the signal of this candlestick pattern. Firstly, the longer the red and green candle bars, the more powerful the reversal will be. Secondly, the higher the green candle closes into the body of the red candle, the more powerful the signal will be.
It is good to see some confirmation on the following day. This can etiher be another green bar, a gap up or a higher close.
Bullish Piercing Line
A bullish piercing consists of two candle bars. The first bar is a red down bar. The stock closed near the bottom of the day. The next day, the stock opens below the previous day's closing price. We call this a gap down.
Things can look pretty scary. However, the stock starts to rise again and closes near the middle of the previous day's bar. Things may not look that bad after all. The bears will begin to lose confidence and they may cover their shorts. The bulls also become more confident and may think of buying the stock again.
There are some factors which will enhance the reversal signal that you should look out. The greater the green candle pierces into the previous red bar, the stronger the reversal signal. It is best to have the second day candle pierce more than half of the previous day's candle. It is also good to see heavier volume during these two days.
Also, the longer the two bars are, the more forceful the reversal will be. The distance of the gap down(the opening of the second day) from the first day's close is also important. The greater the distance of the gap down from the first days' close, the stronger the reversal will be.
A bullish piercing shows a potential reversal. This pattern can occur at the end of a declining market. As with most candlestick patterns, it is good to see some confirmation on the following day. This can etiher be another green bar, a gap up or a higher close.
This candlestick pattern is considered the strongest candlestick signal.
On the first day, a large red candle forms. The next day, the stock gaps up and forms a large green candle. The two candle bars do not have shadows. When you see this pattern forming in a downtrend, it is a strong sign that the market may be heading up.
Imagine what has been going on. The stock has been falling down and everybody is panicking and wants to sell. The short sellers are very happy. However, the next day, the stock gaps up and shoots all the way up. The loss yesterday is completely erased. Short sellers are also shocked and they start to cover their shorts.
What happened was, the entire sentiment of the market participants has changed dramatically.
Just like the other patterns, there are some factors that enhance the signal of this pattern. Firstly, the longer the candles are, the more powerful the reversal. Secondly, note the gap. The further the gap up is from the first day's open, the more powerful the signal is.
This candlestick pattern is a very reliable pattern. It works quite well especially in oversold areas. Usually, the pattern is associated with some good news or surprise news which have just came out.
As with most candlestick pattern, it is good to see some confirmation on the following day. This can etiher be another green bar, a gap up or a higher close.
Morning Star/Morning Doji Star
The first day is a long red candle. On the second day, the stock gaps down. However, the stock does not go down much. The trading range of the second day is small. On the third day, the stock gaps up and forms a long green candle. The long green candle should close at least halfway into the body of the first day's red candle.
The morning doji star is quite similar to the morning star pattern. The difference is, on the second day of the morning doji star, a doji is formed and not a small range candle. That is why it is called a morning doji star pattern.
These patterns gives a bottom reversal signal. Just like its name, the morning star tells us of a brighter future. It shows us that there is a possibility that the stock will rise.
There are a few factors that we should look at which will enhance the signal of this pattern. Firstly, the longer the first and third candle bar is, the more forceful the reversal will be.
Secondly, on the second day, the more indecision there is, the higher the possibility a reversal will occur. Thus, a doji appearing on the second day will give us a better signal than a small body appearing. Thirdly, the more the third day's candle close into the body of the first day, the greater the strength of the reversal will be.
These two patterns have a very high reliability. Again, as with most candlestick pattern, it is good to see some confirmation on the following day. This can either be another green bar, a gap up or a higher close.
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