USING BULLISH CANDLESTICK PATTERNS TO BUY STOCKS

USING BULLISH CANDLESTICK PATTERNS TO BUY STOCKS

• Marianna Galstyan is an accomplished business consultant with over six years of experience and a seasoned financial policy analyst with over three years of expertise.
• Charles has spent the last three decades establishing comprehensive training programs for aspiring financial professionals, earning him a reputation as a leading capital market education expert. Charles has spoken at Goldman Sachs, Morgan Stanley, Societe Generale, and many other prestigious financial houses.
• Diane Costagliola has worked as a researcher, librarian, professor, and writer for many years. She now instructs business and economics majors on research, information literacy, and the art of writing. In addition, she writes about personal finance topics in her articles and reviews, including mortgages, house purchases, and foreclosures.
• If you’re interested in following the price of a security, candlestick charts are a valuable financial tool. They have found their way into current pricing charts, although their roots are in the centuries-old Japanese rice trade. In addition, some investors use them because they’re simpler to read and more aesthetically pleasing than bar charts.
• Candlesticks take their name from the fact that their rectangular form and terminal lines are reminiscent of burning candles. It is common practice for each candlestick to represent one day’s stock price information. In the long run, the candlesticks cluster into recognizable patterns traders may use to guide their buying and selling choices.

HOW TO READ A SINGLE CANDLESTICK

The four data points (opening price, closing price, high price, and low price) that make up a candlestick’s representation of a stock’s price for a given day indicate that day’s price movement. The actual body, or core rectangle, shows whether the starting or closing price was more significant for the day. A closing price lower than the beginning price is a negative sign. Therefore, a black candlestick or an entire candlestick is indicative of selling pressure. However, a white or hollow candlestick indicates that the closing price was higher than the beginning price. This bodes well for the bulls and indicates robust purchasing activity. The day’s low and high prices are represented by the two lines extending from either end of a candlestick; these are the shadows. The top of the shadow represents the day’s highest closing price, while the bottom represents the day’s lowest closing price.

BULLISH CANDLESTICK PATTERNS

• Over time, different configurations of the daily candlesticks, such as the “three white soldiers,” “black cloud cover,” “hammer,” “morning star,” or “abandoned infant,” become apparent. Stock price patterns that develop over one to four weeks might provide helpful information about the direction of prices in the future. Before diving into specific bullish candlestick patterns, keep in mind these two guidelines:
• In a downward trend, a bullish reversal pattern should emerge. If not, the pattern is only a continuation pattern and not bullish.
• To be effective, bullish reversal patterns must be confirmed by subsequent price action. They need to be followed by a price spike in the upward direction, either in the form of a long hollow candlestick or a gap up, with substantial trading volume. Within three days of the pattern’s emergence, you should be able to see this confirmation.
• Traditional methods of technical analysis, such as trend lines, momentum, oscillators, and volume indicators, may further reinforce the bullish reversal patterns, lending credence to the purchasing push. However, numerous candlestick patterns signal a potential buying opportunity. Here, we’ll look at the top five bullish candlestick patterns that might signify a trend reversal.

1. THE HAMMER OR THE INVERTED HAMMER

If a stock forms a bullish reversal pattern known as a “hammer,” it usually means the price has reached the lowest point in a downtrend and is about to begin an upward movement. The candle’s short body and lengthy lower shadow indicate that selling pressure drove prices down throughout the trading session, but that intense buying pressure led to a higher close. It’s essential to confirm the rising trend by keeping a careful eye on it over the following few days before getting in on the bullish reversal movement. The increase in trade volume should further confirm the turnaround.

The inverted Hammer is a reversal pattern or support level that may also emerge in a downtrend. It’s a similar pattern to the Hammer but with a long upper shadow, indicating purchasing pressure after the initial price and then significant selling pressure that wasn’t enough to push the price below the opening value. Once again, bullish confirmation is needed, and this time it might come in the shape of a long hollow candlestick or a gap up on high trading volume.

2. THE BULLISH ENGULFING

Two candles form the bullish engulfing reversal pattern. Without regard to the length of the tail shadows, the second candle totally ‘engulfs’ the natural body of the first candle. A bullish engulfing pattern consists of one black candle followed by a giant white hollow candle that often emerges during a decline. The pattern is confirmed when, on day two, the price starts lower than the previous low but then rises to a new high. This is a clear victory for the purchasers. When the price breaks out above the peak of the second engulfing candle, confirming the downtrend reversal as described at crypto4pro.com/, it is preferable to begin an extended position.

3. THE PIERCING LINE

The Piercing Line is a two-candle bullish reversal pattern that occurs in downtrends. This pattern is comparable to the engulfing pattern. One long black candle is followed by a white candle that opens below the prior close. Soon after, the purchasing pressure causes the price to rise into the actual body of the black candle, often halfway or more.

4. THE MORNING STAR

As its name suggests, the Morning Star is a beacon of light in the midst of darkness and a chance for a fresh start. One little candle (a Doji or spinning top) is sandwiched between a long black candle and a long white candle to form the pattern. In reality, the short candle might have a white or black body, and its body does not blend into the previous black candle’s. Nevertheless, it’s evidence that the selling pressure from the day prior is easing. An increase in volume and the appearance of a third white candle that overlaps the black candle’s body suggest the beginning of a bullish reversal.

5. THE THREE WHITE SOLDIERS

As a rule, this pattern becomes apparent following a decline or during a time of price consolidation. There are three long white candles with rising highs at the closing of each successive trading day. Every candle in this chart begins higher than the preceding and ends around the day’s high, indicating a consistent rise in purchasing interest. When white candles seem abnormally lengthy, investors should be wary that short sellers may flock to the market and drive the stock’s price further down.

Putting it all together

• Three of the aforementioned bullish reversal patterns are seen in the Enbridge, Inc. (ENB) chart: the inverted hammer, the piercing line, and the hammer.
• Pacific DataVision, Inc. (PDVWchart)  has a Three White Soldiers pattern. Take note of the sudden uptick in volume once the downtrend is reversed.

THE BOTTOM LINE

• Candlestick charts are another technical analysis tool that investors may employ (i.e., to study the psychology of market participants in the context of stock trading). Their analysis supplements the basic research on which trading choices are based.
• We analyzed five common candlestick chart patterns that usually indicate a good time to purchase. They may be used to spot a shift in traders’ mood when the buyer’s power begins to outweigh that of the seller. Any such downward trend reversal may be followed by a prolonged period of profit. Nonetheless, seeing a pattern does not guarantee that the trend will change direction. Before entering a trade, investors should always wait for more price action confirmation of a reversal.
• While technical analysis might be helpful in making specific predictions about the market, there are better methods than this. First, you’ll need a broker account to put money to work. Consider reviewing Investopedia’s top online stock brokers list to obtain an overview of the leading options available.