Have you seen a happy dog? How do you know that it’s happy?
The signs of a happy dog include the wagging of its tail fast and hard, running towards you to lick and hug you, and sometimes barking in excitement.
Just like the stock market, there are signs to tell if a stock is recovering or reversing, and they are reflected in candlestick patterns.
In Part 1, you’ve learnt about 3 bullish reversal candlestick patterns – Hammer, Bullish Belt Hold, and Bullish Engulfing. You’ve also uncovered the misconception of traders. The same misconception applies to the bullish reversal candlestick patterns in Part 2. Hence, I strongly encourage you to read Part 1 first.
Done that? All right! In Part 2, you’ll be learning 4 more bullish reversal candlestick patterns. Let’s check them out.
#1 Piercing Pattern
From the table below, you’ll learn of the 4 characteristics of the Piercing Pattern and its significance.
The 2 vertical lines before the Piercing Pattern represent the range of the previous candles. Their color, shape and size are not important. The most important thing is that they are trending down.
As with most of the other candlestick patterns, a gap down for the bullish candle (in green) is necessary.
Trading Psychology
Let’s have a look at the chart of MCD. The Piercing Pattern appeared in mid-May 2020.
As mentioned, the 1st candle must be bearish (in red). The 2nd candle must open below the closing price of the 1st candle, and then close at or above the halfway line of the 1st candle.
What happened as this bullish reversal candlestick was forming?
The bears were in firm control, as shown by the 1st bearish candle. In the pre-market session, bears continued to push the price of MCD down. Therefore, MCD opened lower that the low of the 1st candle.
The ferocity of the bears can be inferred from the gap size; the larger the gap down, the strong the bears are.
The bears were still in control as the bulls tried to fight back. The bulls finally win, sending the price of MCD up for that day. Most importantly, the closing price of MCD for that day is higher than the halfway mark of the 1st candle. Since the length of the bullish candle measures the strength of the bulls, the taller it is, the stronger the bulls are.
Given that the bulls have managed to push the price above the halfway mark of the 1st candle, this signals that the bulls have ended the bearish streak. The bulls pushed prices up by $30 (17%) in just 3 weeks!
Pay attention to volume. A high volume adds weight to this bullish reversal candlestick pattern.
#2 Bullish Deaisen
What are the characteristics of the Bullish Deaisan?
The 2 vertical lines before the Bullish Deaisan represent the range of the previous candles. Their color, shape and size are not important. They must, however, be trending down.
As with most of the other candlestick patterns, a gap down for the bullish candle (in green) is necessary.
Trading Psychology
This bullish reversal candlestick pattern showed up in the chart of DIS in late June 2020.
As you can tell, the share price of DIS had been falling before the Bullish Deaisen appeared. After which, its price ranged for a short while before flying by $11 (10%) in a short 2.5 weeks!
What happened as the Bullish Deaisen formed?
The bears were in total control, which can be seen from the 1st bearish candle of this candlestick pattern. In the pre-market session, bears continued to push the price of DIS down, resulting in a gap down.
While the stock market was open, the bulls fought back. It was a tough fight and the bulls eventually won that day.
The bulls were strong enough to push price up to the point of the previous day’s closing price. This indicates that the bulls are counter-attacking; bullish momentum is returning.
Volume is a good confirmation for this bullish reversal candlestick pattern. You’ll want to see higher than usual volume.
#3 Bullish Kicker
Let’s discover the characteristics of a Bullish Kicker in the table below.
The 2 vertical lines before the Bullish Kicker represent the range of the previous candles. Their color, shape and size are not important. They must, however, be trending down.
Unlike most of the other candlestick patterns, a gap up for the bullish candle (in green) is necessary.
Trading Psychology
A Bullish Kicker can be found in the chart of YUM in early April 2020.
The share price of YUM jumped by $18 (25%) in just 3 weeks after the Bullish Kicker appeared. Let’s examine the psychology behind.
As per normal, prices have to be declining. This means that the bears got to be in control. The strength of the bears weakened over time, allowing the bulls to take over.
This resulted in a gap up and prices rose thereafter.
There is added conviction that prices will move upwards when the bullish candle is a Marubozu.
Forgot what a Marubozu is? You can refer to the cheat sheet done up for you in this article.
Of course, a high volume is welcomed. That would add even more conviction to a bullish reversal that’s coming up.
#4 Tweezer Bottoms
There are only 2 characteristics that you need to pay attention to the Tweezer Bottoms. They are listed in the table below.
The 2 vertical lines before the Tweezer Bottoms represent the range of the previous candles. Their color, shape and size are not important. They must, however, be trending down.
The Tweezer Bottoms are slightly different from the rest of the bullish reversal candlestick patterns in one aspect – the direction of the gap between the 1st and 2nd candles doesn’t matter.
Don’t the Tweezer Bottoms look like a Hammer candlestick pattern instead?
Not exactly. The lower wick/shadow of a Hammer has to be below the low of the 1st candle while the low of both candles are the same for the Tweezer Bottoms.
Trading Psychology
Let’s uncover the psychology behind the Tweezer Bottoms that had showed up on SERV in late June 2020.
Prices were declining as the bears were in full control. This stopped when the Tweezer Bottoms appeared.
A Bullish Engulfing candle appeared, ending the downtrend. In that Bullish Engulfing candle, the bears seemed to be stronger as there was a thrust down, forming the lower wick/shadow. However, they were subsequently overpowered by the bulls.
When Tweezer Bottoms are formed with another candlestick pattern (a Bullish Engulfing candlestick pattern, in this case), the chances of a bullish reversal occurring is increased.
Remember to have a look at the volume as that would further add more conviction.
3 Things You Must Remember About These Candlestick Patterns
Here are the 3 key things you must definitely remember to trade profitably:
#1 The candlestick patterns shown here are made up of 2 candlesticks
#2 A combination of candlestick patterns add conviction
#3 Volume is key
Come back for more bullish reversal candlestick patterns next week and trade safe!
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