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Understanding Candlesticks Part-2

Updated: Jul 2

If you haven't read Part 1, read that here.


Bullish Patterns

After discussing the basics of Candlestick we would be further discussing about bullish candlestick patterns.

Bullish Hammer

This pattern occurs at the bottom of a trend or during a downtrend. It is a single candlestick pattern that has a long lower shadow and a small body at the top of its trading range.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • A small body at the upper end of the trading range is observed. The colour of the body is not important.

  • The lower shadow of this candlestick is at least twice as long as the body.

  • There is (almost) no upper shadow.

Candlestick Pattern Interpretation

The Bullish Hammer appears in a downtrend, a sharp selloff is witnessed during the trade. After the decline comes to an end, the price almost returns to the high of the day. The market fails to continue on the selling side. This price movement reduces the previously bearish sentiment causing short traders to feel increasingly uneasy with their bearish positions. If the body of the Hammer is blue, then the situation looks even better for the bulls.


Buy/Stop Loss Levels

The confirmation level is defined as the top of the Hammer’s body. Prices should cross above this level for a buy signal to be initiated. The stop loss level is defined as the low of the candlestick pattern.

Bullish Belt Hold

Bullish Belt Hold is a single candlestick pattern, basically, a blue Opening Marubozu (long candlestick with no lower shadow) occurs in a downtrend. It opens at the low of the day and then rallies against the current trend in the market to close near the high.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • The market gaps down and opens at its low, and closes near the high of the day.

  • A long blue body that has no lower shadow is observed.

Candlestick Pattern Interpretation

The market opens lower with a significant gap in the direction of the existing downtrend. However, soon after the market opening, sentiment changes rapidly and the market moves in the opposite direction from there on. This causes fear among traders who have short positions, leading to the covering of short positions, which further aids the rally in the market.


Buy/Stop Loss Levels

The confirmation level is defined as the last close. Prices should cross above this level for a buy signal to be generated. The stop loss level is defined as the low of the candlestick pattern.

Bullish Engulfing

This pattern is characterized by a large blue body engulfing a prior smaller red body, which appears during a downtrend. The blue body does not have to engulf the shadows of the prior candle but it totally engulfs the body.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • A red body is observed on the first day.

  • The blue body is formed on the second day completely engulfing the red body of the prior day.

Candlestick Pattern Interpretation

While the market is characterized by a downtrend, selling is observed with the occurrence of a red body on the first day but with light volumes. The next day, the market opens lower. It looks as if there’s going to be a continuation of the bearish trend, however, the selling pressure loses momentum and the bulls gain control during the day. The buying force overcomes the selling force and in the end, markets managed to close above the open of the prior day.


Buy/Stop Loss Levels

The confirmation level is defined as the last close. A buy signal is generated when prices move above the second candles close. The stop loss is defined as the low of the candlestick pattern.

Bullish Harami

This pattern consists of a large red body on the first day followed by a small blue body the next day that is completely inside the range of the red body. It tends to act as a reversal pattern.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • A red candlestick is observed on the first day.

  • The blue body that is formed on the second day is completely engulfed by the body of the first day.

Candlestick Pattern Interpretation

The market is characterized by a downtrend and a bearish mood, and there is heavy selling reflected by a red body. The next day prices open higher or at the close of the preceding day and steadily rises bringing a sense of fear among the short-sellers. This leads to the covering of short positions, causing the price to rise further. Some short sellers however still expect the market to correct and continue shorting thus limiting the rise. Hence, a small blue body is formed. This may signal a trend reversal since the second day’s small real body shows that the bearish power is diminishing.


Buy/Stop Loss Levels

The confirmation level is defined as the last close or the midpoint of the first red body, whichever is higher. Prices should cross above this level for a buy signal to be generated. The stop loss level is defined as the lowest point among the two candles.


Bullish Doji Star

It consists of a red candlestick followed by a Doji with a downward gap at the opening the next day. This pattern appears in a downtrend and indicates that the trend will reverse.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • On the first day, a red candlestick is observed.

  • Then we observe a Doji on the second day that gaps down.

Candlestick Pattern Interpretation

The market is in a downtrend and a large red candlestick further confirms it. The next day markets open lower with a gap down, and trades in a small range. The closing price and opening price are similar, causing the formation of a Doji. Bearish sentiment was prevalent during the downtrend but now a change is implied by the formation of a Doji Star, which shows that the bulls and the bears are in equal control. The bearish sentiment has reduced. It is not favourable to further short at current levels.


Buy/Stop Loss Levels

The confirmation level is defined as the midpoint of the gap between the Doji and the prior day’s candlestick. Prices should cross above this level for a buy signal to be generated. The stop loss level is defined as the lowest point among the two candles.

Bullish Morning Star

This is a three-candlestick pattern indicating a bottom reversal. It is composed of a red candlestick followed by a short candlestick, which opens lower to form a star. The following day we have a blue candlestick whose closing price is well into the first session’s red body.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • We observe a red candlestick on the first day.

  • Then, we see a short candlestick on the second day that gaps in the direction of the prevailing downtrend.

  • A blue candlestick is witnessed on the third day.

Candlestick Pattern Interpretation

A downtrend is in progress and the formation of a red candlestick on the first day confirms the continuation of the downward trend. The appearance of the short candlestick with a gap the following day indicates that bears are still pushing down the price. However, the narrow price movement on the second day indicates indecision. The third day is a blue body candlestick where price closes well into the first day’s red body. Indicating a reversal in trend.


Buy/Stop Loss Levels

The confirmation level is defined as the last close. Prices should cross above this level for a buy signal to be generated. The stop loss level is defined as the lowest point in the candlestick pattern formation.

Bullish Morning Doji Star

This is a three candlestick pattern signalling a bottom reversal. It is composed of a red candlestick followed by a Doji, which usually gaps down to form a Doji Star. On the third day, we have a blue candlestick whose closing price is well into the first session’s real body.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • We observe a red candlestick on the first day.

  • Then, we see a Doji with a gap down on the second day.

  • A blue candlestick is observed on the third day.

Candlestick Pattern Interpretation

A downtrend is in progress, and the red candlestick on the first day confirms this. The appearance of the Doji with a gap indicates that bears are still in control. However, the narrow price action between the open and the close shows indecision. On the third day, the body of the blue candlestick is above the previous day and closes well into the body of the red day.


Buy/Stop Loss Levels

The confirmation level is defined as the last close. Prices should cross above this level for a buy signal to be generated. The stop loss level is defined as the lowest point of the candlestick pattern formation.

Bullish Piercing Line

This is a bottom reversal pattern with two candlesticks. A red candlestick appears on the first day while a downtrend is in progress. The second day opens gap down at a new low but manages to close more than halfway into the prior candlestick’s red body, leading to the formation of a strong blue candlestick.


Identification Criteria

  • The market is characterized by an existing downtrend.

  • A red candlestick appears on the first day.

  • On the second day, we witness a gap down opening but the candlestick manages to close more than halfway into the body of the first red candle

Candlestick Pattern Interpretation

The market is currently in a downtrend. The first red body reinforces this view. The next day the market opens gap down, showing that the bearishness still persists. After this very bearish open, bulls take charge. The market surges toward the end of the session, resulting in a close way above the previous day’s close. A sense of fear develops among the short-sellers who consider covering their position resulting in a further surge in prices.


Buy/Stop Loss Levels

The confirmation level is defined as the last close. Prices should cross above this level for a buy signal to be generated. The stop loss level is defined as the lowest point of the candlestick pattern formation

Bullish Three White Soldiers

This pattern indicates a bottom reversal in the market. It is characterized by three blue body candlesticks moving upwards. The opening of each day is slightly lower than the previous close and prices progressively close at higher levels.


Recognition Criteria

  • The market is characterized by an existing downtrend.

  • Three consecutive slightly long blue candlesticks are observed.

  • Each candlestick opens within the body of the previous day.

  • Candlesticks progressively close at new highs, above the previous day.

Candlestick Pattern Interpretation

The pattern appears in a prevailing downtrend where the price is testing new lows or is already at the bottom. Then we see the first blue candlestick which makes an attempt to move upwards. The trend persists for the next two days progressively making new highs at the close. This brings about a sense of fear among the bears who now consider closing their short positions leading prices to head further.


Buy/Stop Loss Levels

The confirmation level is defined as the last close. Prices should cross above this level for confirmation. The stop loss level is defined as the lowest point of the candlestick pattern formation

Disclaimer: This post originally appeared on Stock Market Strategies written by Abhijeet Kumar and has been reproduced here (with certain minor edits) with his kind permission.

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