TL;DR
- Bullish candle patterns are an important part of traders' technical analysis strategies for detecting trend reversals.
- When trying to identify bullish candlestick patterns, it's important to look at multiple indicators and not just the candlesticks themselves.
- These bullish candlesticks provide a trader with an entry point for long trades and help predict a potential downtrend when a reversal happens.
- Technical traders often look at the fundamentals of the market to back up what they find in technical analysis.
Bullish candle patterns are an important part of traders' technical analysis strategies for identifying trend reversals. The formation of this reversal pattern can suggest a shift in the market in favor of bulls, who may push prices significantly upward.
One of the biggest mistakes when looking out for patterns is looking at too many patterns at once which can end up making you confused. So, it's important to look out for specific pieces of evidence which can help you with decision-making.
There are 2 main things to look out for when identifying patterns. First, positive reversal patterns can be present in downtrends, this does not mean it’s a bullish pattern, but rather a continuation pattern. Second, to identify a bullish trend, reversal patterns are required. This means a strong upward price movement, either in the shape of a gap up or a long hollow candlestick, with a lot of trading volume.
With that in mind, let’s take a look at the top 5 bullish candlestick patterns for crypto trading.
Hammer
The "T" shape resembles a hammer. It forms when an asset opens much lower than its closing price but then stages a strong rally. The pattern creates a literal hammer-like shape, with a bottom shadow that is at least twice as large as the actual body. A hammer pattern suggests sellers have given up, and the market is now slowly rising, signaling a possible shift in trend. This takes place in a single period during which the price first drops after the market opens but recovers near the starting price.
The following candle can confirm a hammer pattern by opening with a significant price hike and then closing well above the hammer's closing price. Indicating sustained purchasing activity. Buyers often enter the market after the confirmation of the candlestick pattern. Stop-loss orders are set below the hammer's low. If the price is rising strongly upward during the confirmation candle, the stop-loss can be placed just below the real body of the hammer.
Even with solid evidence, hammers are rarely used independently. Such patterns are often confirmed by technical indicators, price analysis, and trend analysis by traders.
Morning Star
The Morning Star consists of three candlesticks that appear after a period of decline. It can signal the beginning of an upward trend, which is an imminent reversal from the prior price trend. However, traders would wait for a morning star to emerge whilst looking out for more indicators to confirm a trend reversal.
Since a morning star may be seen with the naked eye, no special computations are required to identify it. As a three-candle pattern, the morning star starts with a bearish candle, a second candle being the lowest of the time frame, and only becomes visible when the third candle closes.
The formation of a morning star signals the beginning of a bullish trend reversal, but it gains more significance when combined with additional technical indicators. The volume involved in this pattern generation is also crucial.
In principle, a trader hopes that volume will rise over all three trading sessions, with the highest volume occurring on the third day. Although additional signs may be used, the third-day volume highs are commonly seen as confirmation of the pattern (and the upswing). Following the third-session formation of a morning star, positive positions in the underlying assets are opened until further reversal signals appear.
Bullish Engulfing
Bullish Engulfing is a pattern represented by a green candlestick experiencing a higher closing price than its opening price, a great indication of bullish sentiment. This pattern is identified by the presence of a small red candlestick, indicating a bearish trend. Followed by a massive green candlestick, indicating a bullish trend. The body of the green candle engulfs or covers the previous bearish candle, hence the name Bullish Engulfing.
Bullish engulfing patterns occur when the price opens lower on the second day than it did on the first day. It indicates that the bears initially control the market but are overthrown by the bulls by the timeframe’s closing. If the price does not drop quickly, the body of the green candlestick will not cover the body of the red candlestick from the day before. A bullish engulfing pattern indicates that asset value continues trending upwards and closes at or around its greatest point.
Three White Soldiers
The Three white soldiers is a bullish pattern that predicts the recovery of an ongoing decline. The pattern forms when three successive long-bodied candles all begin around the end of the real body of the prior candle and end trading above its peak. These candles shouldn't experience long shadows and should preferably open within the previous candle's real body.
The changes in market attitude towards the asset are strongly indicated by the appearance of the three white soldiers. A closing candle that contains a small or no shadow indicates that buyers have maintained control of the session high. Essentially, the bulls control the rally throughout the session and close around the day's high for 3 straight sessions. Additionally, the pattern could be followed by other reversal-suggesting candlestick patterns.
This visual pattern of three white soldiers is used as a gateway into or out of trade since it is seen as bullish. For traders already long on the asset, the appearance of the three white soldiers signals an exit, but for those looking to enter a bullish position, it signals a good time to do so.
On the other hand, the powerful upward swings within this pattern might lead to temporary overbought situations, where indicators like the Relative Strength Index (RSI) can indicate an overbought situation.
The three white soldiers pattern is sometimes followed by a brief period of consolidation, but the near- and intermediate-term outlook is still positive.
The Piercing Pattern
The Piercing Pattern can signal a possible short-term reversal, from a downward trend to an upward trend. As a two-day candlestick pattern formation, the first day ends with a gap down, which is followed by the next candle opening near the low and closing near the high of the previous candle. The green candle should cover at least half of the upward length of the red body from the previous day.
This pattern is formed because the first-day trading is heavily dominated by sellers, while the second day is driven by eager purchasers. This could be a sign that the buying pressure has increased and the volume that market participants wish to sell has been exhausted. The current trend suggests that the approaching outlook will be positive.
Technical traders often look for the piercing pattern as a possible bullish reversal indication. The pattern is rather uncommon in its purest form, but it appears to function more effectively the longer the downturn is in front of it. This two-day formation is more convincing when it coincides with a bullish divergence in a relative strength index (RSI), stochastic oscillator (STO), or moving average convergence divergence (MACD).
Following a piercing pattern, a trader should keep an eye out for a breakaway gap, as the pattern itself is usually simply a potential indicator for reversal. You can recognize this pattern if the price gap between the previous day's close and the next day's open is relatively large and stays that way for both green candles.
Conclusion
Learning to trade cryptocurrency requires some knowledge in both technical and fundamental analysis, which goes hand-in-hand with formulating a robust cryptocurrency trading strategy.
Technical and fundamental analysis are frequently considered diametrically opposed methodologies for examining crypto. However, some investors have found success by combining the two. Fundamental research can be used to find hidden opportunities, while technical analysis can be used to find the exact entry and exit points.
Technical traders often look at the fundamentals of the market to back up what they find in technical analysis. If a breakout happens right before a significant event, a trader may look at the fundamentals to see if it is likely to achieve some milestone that can give it a positive sentiment.
Disclaimer: The information and publications in this article are not intended to be and do not constitute financial advice, investment advice, trading advice, or any other advice or recommendation offered or endorsed by Coins.
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