In this article, we will teach you how to spot bullish candlestick patterns so that you can confidently trade stocks in the UK. Although there is no foolproof method to investing, you will be taking an essential step towards becoming a successful trader by learning how to identify these formations.
To make informed and intelligent investment decisions, any investor, whether novice or experienced, must understand technical analysis. Technical analysis studies price movements and trading volumes to determine future stock prices. One of the most popular methods of technical analysis is using candlesticks.
What bullish candlestick patterns are, and how they can be used to predict stock prices
Candlesticks are graphical representations of price data over a given period, and each one conveys essential information about the market during that time frame. The candlestick is comprised of a natural body, representing the difference between the open and close price, and upper and lower shadows, representing the high and low prices reached during that period.
The colour of the natural body also provides information, with green bodies indicating that the stock closed higher than it opened (a bullish candlestick) and red bodies showing that the stock closed lower than it opened (a bearish candlestick).
The different types of bullish candlestick patterns
There are many candlestick patterns, but we’ll focus on three bullish ones: the hammer, the inverted hammer, and the shooting star.
The hammer is a single candlestick pattern that can be found at the bottom of a downtrend or during a period of consolidation. It is characterised by a small natural body, with the open and close price being close to each other and a long lower shadow. The long lower shadow indicates that although the stock price fell during the period, it rebounded strongly before closing. This rebound shows that there is buying pressure in the market and that the bulls are beginning to take control.
The inverted hammer
The inverted hammer is very similar to the hammer but occurs during an uptrend or period of consolidation instead of a downtrend. It is also characterised by a small natural body, with the open and close price being close to each other and a long upper shadow. The long upper shadow indicates that although the stock price rose during the period, it pulled back before the close. This pullback shows that there is selling pressure in the market but that the bulls were able to take control by the end of the period.
The shooting star
The shooting star is a single candlestick pattern found at the top of an uptrend. It is characterised by a small natural body, with the open and close price being close to each other and a long upper shadow. The long upper shadow shows that although the stock price rose during the period, it pulled back significantly before the close. This pullback indicates that there is selling pressure in the market and that the bears are beginning to take control.
How to start trading stocks using bullish candlestick patterns
Now that we have identified the different bullish candlestick patterns let’s look at how you can start trading stocks using them.
First, find a stock you are interested in and then look at its price chart. Once you have found the chart, you will need to identify periods where a bullish candlestick pattern formed.
Once you have found a period where a bullish candlestick pattern formed, you will need to check the volume to see if there was an increase when the pattern formed. An increase in volume shows that there was more interest in the stock shares during that period, thus increasing the candlestick pattern’s validity to buy shares.
If there was an increase in volume when the bullish candlestick pattern formed, you could enter a long position when the price breaks above the high of the candlestick pattern. Your stop loss should be placed just below the low of the candlestick pattern, and your target profit should be set at a 1:1 risk to reward ratio.