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Candlestick Reversal Bottoms
In addition to depicting the trading action during a given time
period more visually, candlestick charts also provide a more visual
picture of price reversal patterns signaling the market may be ready
to start a new trend.
One candlestick itself can provide important information about the
strength or weakness of the market during a given day or other time
period and can suggest a price turn. However, it typically takes
several candlesticks to produce chart formations that give the best
candlestick signals. Of course, much depends on where a given candle
or candlestick formation occurs during the market action, a point
that cannot be emphasized too much, as candlesticks may look
identical but have a different meaning after an uptrend than they do
after a downtrend.
Here are some candle signals at a bottom suggesting the previous
downtrend should reverse into a bullish uptrend.
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Hammer or Shaven Head
The hammer (takuri)
is a bullish reversal pattern occurring within an established
downtrend. It has a small real body (white or black) at or near the
high (thus, little or no upper shadow), and it has a long lower
shadow, which implies that extreme low prices were rejected by the
market. The hammer's small real body implies the previous downtrend
is losing momentum. The market can be said to be hammering
out a base. Another name applied to a candlestick (white or black)
with no upper shadow is shaven head. |
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Inverted
Hammer or Shaven Bottom
The inverted
hammer is a bullish
reversal pattern that follows a downtrend. It has a small real body
(white or black), long upper shadow (longer than the body) and
little or no lower shadow. This pattern is confirmed the next day by
a strong upside gap on the open followed by further substantial
upside movement to form a large white real body. Another name
applied to a candlestick (white or black) with no lower shadow is
shaven bottom. |
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Bullish
Engulfing Pattern
The bullish engulfing pattern is a major bottom
reversal signal pinpointing a trend change from bearish to bullish.
It is a two-candlestick pattern where a small black body for the
previous period is followed by and contained within a large white
body for the current period, which engulfs one or more previous
candlesticks. |
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Piercing
Pattern
The piercing
pattern (or piercing line) is similar to the engulfing pattern, but
the signal candlestick does not engulf the previous candlestick.
Following a long black candlestick for the previous period, the
price gaps lower on the open for the current period, below the
previous low. Later, the price reverses strongly upward to close
above the midpoint of the previous period’s black real body. The
higher the current close relative to the previous period’s black
real body, the more meaningful is the piercing pattern. The strong
price reversal demonstrates that the extreme low price on the open
was rejected by the market and implies that the balance of power has
shifted to the bulls. |
Stars
Stars are reversal patterns that
can signal either a top or bottom, depending on the previous price
trend. There are three main bullish stars that follow and reverse a
downtrend.
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The morning
star is a major bottom reversal signal following a decline. It
is comprised of three candlesticks: (1) a long black candle; (2) a
gap-lower open and a small real body (black or white) that should be
entirely below and not touching the real body of the first
candlestick, and (3) a large white real body that closes well into
the long black body of the first candlestick. The longer this third
white real body, the more meaningful it is. Also, a volume surge on
this white real body would add power to the reversal signal. If the middle
candle is a doji, the pattern is called a morning doji star
and is said to be more meaningful than an ordinary morning star. |
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If the middle
doji’s shadows are completely below without touching the shadows of
the first and third candlesticks, the pattern is called an
abandoned baby bottom and is considered to be even more
significant. |
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Bullish
Harami
The bullish
harami, like the star, is a reversal pattern that can occur at
either a top or bottom. The bullish version follows a downtrend with
a long black real body for the previous period. The current period
produces a short white real body, where the current close is
relatively near the open, and both close and open are contained
completely within the previous period’s long black real body. There
should be immediate upside follow-through the next period for
confirmation. |
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Bullish
Harami Cross
The bullish
harami cross is a major reversal pattern similar to the bullish
harami, but in a downtrend, a long black real body is followed by a
doji (open and close at the same price giving a cross-like
appearance) that is contained within the large black body.
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Three White
Soldiers
Three white
soldiers reverse an existing downtrend. Look for three relatively
large, consecutive white candles that close near or at their highs
of the period. |
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Belt Hold
The belt hold
appears in a downtrend when prices open much lower on a large window
(gap) but then close substantially higher, recovering most of the
early loss. |
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Bullish
Counterattack Line
In a
downtrending market, a large black candlestick is following by a
large white candlestick that opens on a big gap lower and then
rallies during the period to close at the same price as the previous
close. The bullish white candlestick needs followup action to the
upside to confirm the turn to an uptrend. |
Three Inside
Up
Three inside up
is composed of three candlesticks. Following a prevailing
downtrend, the first is a large black candle. This is followed by a
short white candle that is contained entirely within the real body
of the previous big black candle. This suggests some loss of
downward price momentum. The third candlestick is a large white
candlestick that closes above the highs of the previous two
candlesticks, thus confirming a bullish change in trend direction.
Three
Outside Up
Three outside
up is also composed of three candlesticks following a prevailing
downtrend. First look for a black candlestick. This is followed by
a larger white candlestick that is an engulfing line – that is, its
real body contains the entire first period’s price range. This
alone suggests a change in downward price momentum. The third
candlestick is a large white candle that closes above the highs of
the previous two candlesticks, thus confirming a bullish change in
trend direction.
Ladder
Bottom
Ladder bottom
reverses a bearish downtrend. After three consecutive and decisive
selling sessions forming three substantial black candles, there may
be some slowing of downward momentum in the fourth period. The
trend change from bear to bull is confirmed in the fifth period by a
relatively large white candlestick that closes on its high and at a
new high relative to the most recent past three periods.
Kicking
Kicking is a
two-day bear trap. Following a decisive day of selling where prices
open on their highs and close on their lows, forming a substantial
black candlestick with no shadows, prices totally reverse on the
open the very next day, forming a rising window on a large upside
opening price gap. Prices close that day on their highs, forming a
substantial white candlestick with no shadows. The bears can’t help
but suffer big losses, and they are likely to be squeezed further in
the days ahead, with the market showing no mercy. The bears suffer a
severe kicking.
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Tweezer
Bottoms
Tweezer bottoms
are two or more candlesticks with matching bottoms. The bottoms do
not have to be consecutive, and size and color are irrelevant. It is
a minor reversal signal that becomes more important when part of a
larger pattern.
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Three
Valleys and Three Rivers
Three valleys
bottom and three rivers bottom are longer-term patterns similar to
the western world’s triple bottom. A buy signal is confirmed when
the price rises above the intervening two rally tops, preferably on
a strong, large white candlestick or a rising window (breakaway gap)
and a rise in trading volume to indicate strong buying.
Inverted
Three Buddha Bottom
Inverted three
Buddha bottom is a longer-term pattern similar to a western inverted
head-and-shoulders bottom. A buy signal is confirmed when the price
rises above the intervening two rally tops, preferably on a strong,
large white candlestick or a rising window (breakaway gap) and a
rise in trading volume to indicate strong buying.
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Fry Pan
Bottom
Fry
pan bottom is a western rounding bottom, where a buy signal is
validated by a rising window (breakaway gap) to indicate strong
buying. |
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Candlestick Chart Basics
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Indecision and Continuation
Candlesticks
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Candlestick Reversal Bottoms
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Candlestick Reversal Tops
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Quick Guide to Main Patterns
Main Trading
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