Bullish Signals - Japanese Candlesticks

Candlesticks are a valid and widely employed technical analysis tool. They are on record as being the oldest type of charts used for price prediction, dating back to the 1700's, when they were used for predicting rice prices.

They can be split into bullish (positive) or bearish (negative) groups. In this overview we will summarise the more well-known 'bullish' candlestick patterns often referred to in our analysis. To read about bearish candlestick patterns, please click here.

The candlesticks themselves and the formations they shape were given colorful names by the Japanese traders. Due in part to the military environment of the Japanese feudal system during this era, candlestick formations developed names such as "counter attack lines" and the "advancing three soldiers". Just as skill, strategy, and psychology are important in battle, so too are they important elements when in the midst of trading battle.

Short-term traders who use these kinds of candlesticks on their charts can quickly see the power that they offer to those who understand them. Like all trading techniques, they have limitations. The big problem with the candletsticks is that traders can jump in early before the candlestick formation has been completed at the end of a trading session, be it an hour, a morning, a full day or weekly time span. It is best to combine the western trading techniques with candletsticks before entering a technical trade. Please click here to view the common traps of candlestick charting.

Bullish Patterns

Long White candle:

The basic bullish candle occurs when prices start low and close significantly higher, somewhere close to the period's high point.

Hammer:

If the Hammer occurs after a significant downtrend it is viewed as a bullish candle. If, however, the candle occurs after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body (that is; a small range between the open and close prices) and a long lower shadow (the low is much lower than the either the open, high, or close).

Piercing Pattern:

The piercing pattern is made up of two candlesticks, the first one red, the second one green, both with fairly large bodies and small tails (shadows). The green candlestick must open below the red candlestick and close at least half way up the body of the red candlestick. The piercing pattern is the opposite of a dark cloud cover and similar to a bullish engulfing pattern.

Just like a bullish engulfing pattern, the piercing pattern is a reversal of a downtrend, therefore, it is considered bullish. The theory behind it is the bears have been in control of the stock (during the downtrend) and then the stock opens below the close of the first candle and the bulls take over

Bullish Engulfing Lines:

The first candlestick represents a falling share price. The second candlestick represents the share price starting low and ending up at or near its highs - typified by the green candle. The size of the red candlestick is not consider to hold significance. The second should be a full green candlestick. As the name dictates, the green candle must totally engulf the the body of the previous red candle, and ideally it would engulf the tails as well.

The bullish engulfing pattern is used when a stock has been declining. The theory is that after a period of selling pressure the green candle forms because the stock has opened below the previous close and buyers have moved in and pushed the price higher. The larger the green "engulfing" candle, the more bullish the reversal. The bullish engulfing pattern basically represents a change in investor sentiment.

Morning Star:

This is a bullish pattern that represents a potential bottom. The "star" indicates a possible reversal and the bullish green candle confirms this reversal.

Bullish Doji Star:

A "star" indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (such as the morning star) before trading a doji star. The first candle can be green or red.