CANDLESTICK PATTERNS: Without knowing when, how, and where to go long on a stock, one cannot truly understand price action. using bullish candlestick patterns in particular. While we’ve previously covered the eight most common bearish candlestick patterns and some of the history of candlesticks, today we’re going to focus on the following:
- The Hammer: A Bearish Engulfing Sandwich with a Bullish Engulfing Crack
- Dawn Star
- Bottom Tweezer
- Punctuating Line
As you read along, make sure to use our Bullish Candlestick Pattern Cheat Sheet for trading and training!
EXPLAINED BULLISH CANDLESTICK PATTERNS
Let’s be honest. Day trading is challenging. Fast and furious is a possibility, especially for newcomers. Stocks rise one minute before falling the next. Although you are hesitant about yourself, you want to start at the bottom. How do you know it will come back down if you want to shorten the top? Day trading is challenging enough without having to struggle to understand charts in the heat of battle.
Fortunately, a lot of the work has already completed for us four centuries ago, to be exact. You must simply invest the time necessary to comprehend price action trading. The significance and usefulness of bullish candlesticks and candlestick patterns lie in this.
- How these patterns appear
- How to determine each entry’s risk
- What are the standards for approving them?
- What narrative do they use
- Typical errors made when interpreting them
- a few approaches to each
1. THE HAMMER
The Hammer resembles the bearish “Hanging Man” quite a bit if you’re aware. Nevertheless, context is everything, as the saying goes. The Hammer is a bullish candlestick reversal candle, much like the Hanging Man. The context is a downtrend that is steady or oversold. This develops the plot of the story that unfolds over the course of the following few candles. We expect the price to eventually bounce back as the price declines more quickly.
But how can we plan ahead without getting sucked into another selloff?
The Hammer is used in this situation. It provides us with proof that the selling pressure is easing or absorbing. Furthermore, it strengthens our thesis if the volume signature connected to the Hammer candle is significant. In addition, to dip buyers who are taking a chance on the oversold conditions, we’re looking to profit from shorts who are taking their gains and covering. the anticipated? an event.
The ideal scenario is to recognize the hammer candle, take a long position on the candle’s break to the upside, and place a risk within the body of the candle, or at its lows.
BULLISH HAMMER EXAMPLE
Let’s examine a real-world instance using PLUG. PLUG retests the pre-market lows right after the opening. On the 5-minute chart shown here, the volume increases slightly as it reverses once it reaches those levels.
A “shelf” is clearly forming close to the body’s low points on the hammer candle. In that price “shelf” area, the bars to the left and right are also closed and open. The second 5-minute chart begins weakly, but quickly rallies above the Hammer candle. Your cue to go far is at this point. The Hammer candle body breaking. Stop below this bullish 5-minute candle’s close.
2.BULLISH ENGULFING CRACK
If you are a short seller, just picture your surprise when a stock initially seems to support your bearish thesis before completely turning around on you. With the Bullish Engulfing Crack, this is the situation. The downward trend seems to be holding. Shorts are stylish and cozy. The previous bearish candle then abruptly reverses its direction.
How can we justify this?
Well, as the stock price rises, it stands to reason that shorts will start to cover. This intensifies the already strong buying pressure. As a result, the bears’ efforts are engulfed by a bullish candlestick pattern. The chance is ideal for the trader with a long bias.
BULLISH ENGULFING EXAMPLES
On the same day as the previous example, let’s use PLUG as another illustration. This time, PLUG experiences a sudden selloff later in the day. Price reaches the previous Hammer candle’s mentioned support level after a sharp decline. This time, the previous bearish candles are completely engulfed by two bullish reversal candles.
Once more, bear in mind that context is absolutely crucial. We have climactic selling pressure and are oversold. Inferring support from the volume at the lows, we can observe that weak hands are dumping their shares.
Let’s consider another illustration.
Here is a quick look at TLRY, which on this particular day provided us with a stunning Opening Range Breakout (ORB) opportunity:
Following the selloff, buyers enter the market and override the pre-market selling pressure, engulfing the bears before moving higher. To be safe, you would enter long either in the body of the first green candle or on the break of the red candle, putting your risk at its lowest. Some experienced traders are more aggressive and might open their positions before others do if they feel the reversal is about to occur.
3.BEARISH ENGULFING SANDWICH
Be not perplexed. This is not necessarily a bearish pattern just because the name is “bearish.” In fact, far from it. It is frequently called the Stick Sandwich. The “bearish engulfing” candle is sandwiched between two bullish candles, hence the name. In this sense, it is a bullish candlestick pattern.
This pattern is very similar to the Bullish Engulfing Crack in the example above, it just takes a little longer to “get going.” Essentially an additional bar. Once more, the idea is to consider who might become trapped. The bears believe that they have prevailed in this particular conflict.
That is the hope, at least, if you are on the shorter side. Stocks, however, don’t always behave in the way we expect them to. Instead of acting on what we believe should occur, we must respond to what the market offers. In this instance, two bullish candles that resolve upward engulf the bearish engulfing crack. Hopefully, if you are short, you adhered to your stop loss. If you are long-biased, this is a fantastic chance for you.
4.THE MORNING STAR
The morning star should gap downward technically. On an intraday basis, it can be challenging to find this. Because of this, a strong Doji candle reversal pattern is sufficient.
The first candle should be bearish and long-bodied. The candle in the middle has a short body. Another long-bodied bullish candle, the reversal candle is bullish (typically a gap up). This bullish long-bodied candle should close above the first candle’s midpoint.
What’s the background to this pattern?
The storyline is typical: oversold circumstances (the gap down). However, the middle candle’s body indicates either hesitation or a lack of action to the downside. As a result, the candle rallies to higher prices in the absence of additional selling pressure as sellers cover and buyers benefit from lower stock prices. Morning Doji Stars are another name for Morning Stars. With the exception of the middle candle’s body, they are virtually identical. The buyer and seller’s journey is still the same.
BULLISH MORNING STAR EXAMPLE
This is demonstrated in the PTON example that follows. A bearish candle with a long body is followed by an uncertain candle with a short body. The following candle sees the bulls seize control; the rest is history.
It is important to pay attention to the first candle’s volume. It’s not safe to assume that it is entirely bearish. As you can see, buying pressure is present at lows. As the Doji candle develops, this inspires confidence in us. As a result, low volume is used as the price moves away from the green candle’s lows.
How do we justify that?
The cost of raising the price decreased. We can infer that there is “ease of movement” to the upside as a result. We should feel more assured in our long position as a result. Visit our tutorial for additional illustrations of the Morning Star and other Doji candles.
There are two candles in the Tweezer Bottom bullish candlestick pattern, and they typically have small bodies. The first candle should be red and bearish, and the second should be green and bullish.
In terms of their closing and opening prices, or wicks, the candle bodies are typically very close together. A “visual” of a set of tweezers is created as a result.
The Tweezer Bottom signals to the chart reader that the price is attempting to move lower but is failing. The two small-bodied candles stand for the existence of market demand.
As supply is being consumed, the volume signature will probably appear elevated, keeping the candles small in the face of selling pressure.
TWEEZER BOTTOM EXAMPLE
On the 5-minute chart, BNGO shows us a lovely Tweezer Bottom candlestick pattern. Pay attention to the two candles’ narrow bodies, symmetry, and red to green close.
Particularly intriguing about this first red doji is the volume. This is elevated, as you can see. We can interpret this as supply absorption given the surrounding circumstances.
The volume of the second candle (green) then rapidly fades. Thus, our hypothesis that selling has been utilized and exhausted is supported.
6.BULLISH PIERCING LINE
The Piercing Line and a Bullish Engulfing pattern can have very similar appearances. The difference is that the preceding candle isn’t completely engulfed by the Piercing Line. Because it beats the downward momentum to close at least halfway into the body of the prior candle, it is still regarded as a bullish candlestick pattern. It pierces the lower line but must inevitably retract, thus the name. With a stop at the lows, the entry is made on the following candle, which confirms the uptrend.
EXAMPLE OF A BULLISH PIERCING LINE
At the lowest points of support, piercing lines can present a very high risk to reward. Even in trading ranges, they can behave like springs. An Opening Range Breakout (ORB) and a Piercing Line are combined in this 5-minute BB chart. It is a combination that, taken as a whole, can significantly boost our entry’s confidence.
How do I recognize these patterns in real-time, you may be wondering.
What a wonderful question.
Practice, practice, practice is the solution. This, according to trading psychologist Brett Steenbarger, Ph.D., is “exactly how expertise is created.” He contends that increasing our chances of consistency can be accomplished by treating trading like a series of performance exercises. 1 I don’t have the luxury of 10,000 hours of practice, you might be saying. And it could be the case. Whatever the situation, you have a job, kids, obligations, etc. However, as Steenbarger points out, you can master a process much more quickly if you can narrow it down to a few distinct, repeatable patterns.