In the world of cryptocurrency trading, understanding candlestick patterns is akin to deciphering a secret code. Since the crypto markets are surprisingly volatile, identifying potential trend reversals is crucial for success. Bullish candlestick patterns offer powerful clues about shifting market sentiment and stand out as symbols of potential growth.
At Altrady, we've helped thousands of traders use these patterns effectively. This guide will explore six key bullish patterns, providing practical insights and real-world examples. Find out more about the intricacies of six key bullish candlestick patterns that can be your allies in the crypto market.
6 Bullish Candlestick Patterns Used in Crypto Trading
1. The Hammer
As its name states, the Hammer is a classic bullish candlestick pattern that resembles a hammer. It's characterized by a small real body near the top of the candlestick with a long lower shadow, which signals strong buying pressure. The color of the body can be either green or red, but a green body is more bullish.
This pattern usually forms after a downtrend and suggests a potential reversal. Traders often see the Hammer as a signal to buy, as it indicates that the bulls are taking control.
This candlestick pattern emerges because of an immediate response of the market when the price reaches key levels where clustered orders trigger a strong buying activity.
Reliable key levels comprise the following scenarios:
Strong support where the price bounced off before, preferably with big candles.
Healthy pullbacks amidst a trend, where a Hammer is likely to appear as new buyers enter the market during the retracements.
The Hammer may represent a trend continuation or shift in the market momentum. In both cases, the pattern should appear accompanied by high volume peaks, which reflects the market pressure.
The increasing volume may serve as confirmation to filter out false signals. For example:
During a shift in a trend, traders can look for a bullish candle following the pattern and enter the market as it closes above the Hammer’s high, confirming the volume impact and reversal move.
In a trend, increasing volume alongside the upside moves may confirm the trend strength, helping traders gain confidence to seize a retracement if a Hammer pattern appears.
2. The Bullish Engulfing Pattern
When it comes to spotting trend reversals, the Bullish Engulfing Pattern is a standout. This pattern forms a two-candlestick pattern: a red one followed by a larger green candle that completely engulfs the previous candle.
It signifies a shift in power from bears to bulls and is often seen as a sign of a strong uptrend and thus, a strong buy signal.
A bullish engulfing pattern suggests that sellers lost the battle, but also that traders are adjusting their positions in favor of the power shift and that is why the previous bearish candle failed while the next candle engulfs it.
This pattern could appear in the following market conditions:
During a failed attempt to continue a downtrend, where buyers come to the fore pushing the price beyond the previous lower high.
Following a breakout move over a resistance as it attempts to retest pushing the price down, but the bullish side finds support at the previous resistance.
Assessing volume remains as a source of confirmation to avoid false signals. In this sense, consider seizing bullish engulfing patterns simply when:
A bullish candle appears following the pattern.
Volume increases amid the pattern formation.
3. The Morning Star
The Morning Star is a three-candlestick pattern that occurs after a prolonged downtrend. This pattern is displayed as a three-candlestick pattern that consists of a red candle, followed by a small candle (either green or red) that gaps below the previous candle, followed by a large green candle that closes above the midpoint of the first candle.
A morning star indicates that the sellers have lost strength and the buyers have taken over; it’s a sign of a major reversal from a downtrend to an uptrend.
We can say that this pattern clearly reflects the process behind a reversal move and how the market psychology changes amidst three micro phases:
A decisive phase that pushes the price down.
An indecision phase that results in a Doji formation.
Finally, a momentum phase that shows the power shift and actual desire of the market towards a bullish direction.
The most reliable Morning Star patterns often occur at the following market stages:
When the downtrend reaches a support area, ideally a key level that causes the trend to slow down, from where the third candle of the pattern bounces off strongly.
When the pattern emerges during a trendline break that completely invalidates the downtrend momentum.
Nevertheless, other forms of confirmation to overcome false signals can employ the following techniques:
Looking for volume climax during the formation of the third candle of the pattern.
Spotting a ‘gap up’ (an empty space) between the second and the third candles, which reflects the hurry of the buyers for entering the market.
4. The Inverted Hammer
Much like its cousin (the Hammer), the Inverted Hammer shows a potential reversal. It has a small real body near the bottom of the candlestick, with a long upper shadow. The color of the body can also be either
green or red, but a green body is more bullish.
This pattern often forms after a downtrend and indicates that the bulls are making a comeback. Traders view it as a signal to go long.
The psychology behind this pattern points to the long upper shadow as a signal that buyers are beginning to gain strength as they push the price up, even though sellers manage to push it down later.
Similar to the Hammer, traders can employ the following confirmation techniques:
Spotting a bullish candle following the Inverted Hammer, which suggests that buyers are taking control over the market.
Identifying increasing volume on the pattern formation alongside the following bullish candle.
5. The Piercing Line
A piercing line is also a two-candlestick pattern that consists of a red candle (bearish) followed by a green candle (bullish) that opens below the low of the previous candle and closes above the midpoint of the previous candle.
A piercing line indicates that the buyers have regained some momentum and have pushed the price higher, and it’s seen as a sign of a possible uptrend.
Essentially, this pattern suggests a potential shift in momentum during a downtrend. Such indication is reinforced when the green candle opens with a notable gap down followed by a strong close above the midpoint of the red candle.
Confirmation techniques for addressing a piercing line comprise the following:
Looking for a consistent higher close on the following candles.
Identifying increased volume along subsequent bullish candles.
6. The Three White Soldiers
The Three White Soldiers is a powerful bullish reversal pattern that consists of three consecutive bullish candles with increasing real bodies.
This sequence reflects a gradual shift in control from bears to bulls, with buyers pushing the price higher with each candle. When traders spot Three White Soldiers, they often interpret it as a strong uptrend and a good moment to enter a trade.
Three consecutive bullish candles are a clear signal that buyers have taken control of the market, at least for a while. This pattern can also anticipate strong and rapid shifts in momentum.
Even though the Three White Soldiers may seem reliable at a first sight, it is not infallible. Confirmation techniques require assessing volume and subsequent higher bullish candles.
To avoid false signals, consider the following:
Spotting increasing volume during the pattern formation.
Evaluating the size of the candle’s body and shadows. The higher their closing prices, the better.
Analyzing the overall market context.
Conclusion
Mastering these six bullish candlestick patterns can give you a significant edge in the crypto market. However, due to the high volatility of the crypto market, it's crucial to always confirm patterns with other indicators, use appropriate risk management (stop-losses), and consider the overall market context.
Remember to use smaller position sizes and wider stop-losses than you might in traditional markets to trade these patterns, backtest your strategies, and gain confidence. Altrady provides the tools you need, start your free trial today and explore the power of candlestick analysis.
