- Candlesticks are commonly used financial charts that reveal the price range and direction within an individual trading session
- Technical traders can use candlesticks to assess market movements and pinpoint formations, continuation and reversals of bullish and bearish trends
- Bullish candlesticks are a sign of an upward trend, helping traders identify profitable trading opportunities and reduce risk
- In this article, we will cover the bullish candlesticks patterns and their most common formations, such as hammer, inverted hammer, bullish engulfing, and morning star
Candlestick patterns help traders Identify profitable trading opportunities and reduce the number of false signals. Above all, candlesticks can help you trade with confidence knowing you are making an informed and researched decision.
Bullish candlestick patterns are a sign of a potential upward trend.
The article assumes you have at least a basic understanding of Forex trading and related terms such as ‘candle,’ ‘bull,’ and ‘bear.’ If not, please review this glossary in our Forex learning centre before you continue reading.
What are candlestick patterns?
A candlestick is a type of financial price chart that represents the direction and range of a price movement. Traders can use candlesticks in technical analysis as a sole trading indicator as well as in conjunction with other technical indicators.
Candlesticks are made of vertically formed rectangular shapes with lines trailing from both ends, so the figure resembles a candle with wicks. This financial chart goes all the way back to the Japanese 17th-century rice trade, and it has been in use ever since.
Each candle represents a trading period for a specific asset that can close above and below the opening price. The colour of the candle is determined by whether it closed at a high or low when compared to its opening price.
A green (or ‘up’) candle closes at a higher price than its opening price, and a red (or ‘down’) candle closes at a lower price.
These candles are typically found against an axis that is representative of the time frame you are trading; for example, M5 candlestick charting uses 5-minute periods. Following the same example, the H1 candlestick denotes a 1-hour trading period.
How to read a candlestick pattern
Candlesticks are packed with deep market insights. Just by looking at the candle, traders can immediately find the following:
Opening price: The top of a candle body denotes the opening price for bearish candles, while the bottom represents the opening price for the bullish candles.
Closing price: Candle top denotes the opening price for bullish candles, and the bottom represents the opening price for the bearish candles.
Highest price: Top wicks or sometimes the body represent the highest price traded in a given session.
Lowest price: Bottom wicks or sometimes the body indicates the lowest traded price for the given session.
Price direction: The price direction can be determined by the colour and location of the candle.
Price range: The distance between wicks reflect the difference between the highest and lowest prices, providing the price range for a session.
The signals that each candlestick sends can be different. Some candlesticks signal bullish trends, as mentioned above, whereas others present information about unchanged trends or bearish patterns and the opportunity to short a market.
How can you tell if a candlestick is bullish or bearish?
Bullish candlestick patterns: The first step in identifying a potential uptrend is looking for a series of green candles that are progressively higher.
Bearish candlestick patterns: The first step in identifying a potential downtrend is looking for a series of red candles that are progressively lower.
Candlesticks can form patterns that reveal overall market sentiment and help traders make an informed decision. This is why it is important to know what you are looking for before spotting a potential entry or exit point.
Bullish candlestick trading strategies
Now that you are familiar with the basics of candlestick charting, let’s introduce commonly observed patterns and how they may be used to your advantage.
The majority of candlestick patterns develop over 1-3 trading sessions, uncovering short-term trading opportunities. Hammers and inverted hammers usually form within a single candlestick. Bullish engulfing can take up to two candlesticks, and morning stars need three.
Depending on your risk tolerance, financial resources, and present market conditions, your trading approach may differ. The following examples should help you identify potential patterns and set the direction of your next move.
Hammer candlestick
The term ‘hammer’ refers to a candle with a long lower wick, which looks like a hammer standing on a string. The bottom is characterised by a long wick, signalling that support was found at this level after buyers stepped in.
Hammer candlesticks form within a short bearish trend. This is often a bullish sign, signalling that the sellers may have become exhausted, allowing the price to rally (move higher), often leading to a trend reversal.
Inverted hammer candlestick
An inverted hammer is similar to the hammer candlestick. It looks more like an inverted form of the hammer candlestick because it has a top wick. Inverted hammer forms when the selling pressure is still strong, pushing to retract the early spike in the trading session. However, the selling pressure is not strong enough to continue the downtrend, leading to a possibility of a trend reversal.
Bullish engulfing pattern
A bullish engulfing pattern is made up of two candles: the first is black, followed by a long white candle that ‘engulfs’ the body of the previous session. This pattern emerges in the downtrend, signalling a potential reversal into a bullish momentum.
The white candlestick must open above the close of the previous session and then trade higher than its opening price to confirm a valid engulfing pattern.
Morning star pattern
The morning star consists of three candlesticks: the first session is a long red candle, followed by a small-bodied candle (a doji). The last session forms another long candle that opens lower but then trades towards its highs before closing at or near the opening price of the first candlestick. The formation vaguely resembles a letter V with candle-wicks stretching from the edges.
This pattern signals a potential trend reversal. The third green candle overlaps with the first black candle, signalling a new buying pressure leading into a bullish trend reversal.
Bottom line
Candlestick charts are a type of chart that shows how the price changes over time. It resembles a candle with two wicks, and each ‘candle’ on the chart is one trading session. The colour—often green and red—of the candle is based on whether it closed at a higher or lower price than when it opened.
Even though traders use candlestick charts in different ways, the basic principles remain the same. This is why it is important to know what you are looking for when trading with candlesticks. Having a solid understanding of candlestick charting will allow you to make informed decisions when entering or exiting trades.
With that said, it is important to mention that all forms of trading carry a risk. Profits are not guaranteed. Therefore, it is important that traders only risk what they can afford.
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