Candlestick patterns are predictive in nature, and they can predict moves in the market, bullish and bearish. The vast majority of the technical analysis tools we use require several days of data to calculate their signal. That’s why we call these trailing indicators.
There are a handful of indicators we call “forward-looking” or “leading” indicators, but all of the signals generated from this type of indicator are based on historical data and apply a formula to anticipate (or lead) where the trade might go next.
In other words, all indicators are trailing.
Not so with Candlestick patterns; it is true, we can not guess what a candle’s signal will be until after the day has closed. However, we can use those patterns to anticipate what will come next. This becomes a very strong leading indicator of what is about to occur.
There are several candlestick patterns that anticipate bearish moves. These are “early reversal” candlestick patterns that show up in a bearish move, just before it turns bullish. Armed with these patterns and a little trading knowledge, you can pick a surprising number of quality trades right near the bottom of their move.
To get the list started, I want to look at one of the more commonly identified bullish signals - the Bullish Engulfing Pattern.
The Bullish Engulfing Pattern, and it’s bearish counterpart, the Bearish Engulfing Pattern, are both fantastic signals to learn to recognize. Not only does the Bullish Engulfing pattern occur fairly often, but it has a very good track record of playing out in the bullish direction (as the name suggests). It’s a great signal to recognize, and one that very often marks the final low of a bearish move (at least for the time being).
Here’s what a Bullish Engulfing pattern looks like:
Like the majority of early reversal patterns, this pattern consists of two candle lines. The first candle is usually a small black bearish candle (spinning top), and the second candle is a large (above average) bullish white candle.
The second candle opens with a gap lower, but then trades up and closes with a close above the previous candle’s opening price.
This pattern needs to appear at support or at the very least, after a bearish swing. If it appears at resistance, we do not call it a bullish engulfing and the chances of it playing out bullish may or may not come to fruition.
This pattern is very often the final two candles of a bearish swing. Look at any chart, and you will likely find a high number of these patterns at some of the most significant bottoms.
Like most reversal signals, when you see this pattern, it is an indication that this trade is about to turn up.
The Bullish Piercing Pattern gets its name because the 2nd candle “pierces” into the same trading range as the first candle. Think of this like a battle (many Japanese trading concepts are battle oriented).
In the case of the Bullish Piercing, the bears are winning. They are taking back territory and pushing the bulls back. But suddenly, after a big surge by the bears, the bulls regain their strength and not just counter the move, but pierce back into the territory previously taken by the bears.
The Bullish Piercing pattern is similar to a Bullish Engulfing in the sense that it is a 2-candle line pattern where the first candle is black, and the second candle is white. But with the Bullish Piercing, the first candle is typically an average or long day candle (no spinning tops).
The second candle gaps down to start the day, appearing as though the bears are going to continue destroying everything in their path. But then, in a move that shocks most, the bulls return and not just push the bears back, but actually, force the bears to retreat. The candle reveals that on the second day, the bulls trade at least halfway into the first candle.
This pattern is a very consistent pattern which often leads to a bullish swing or a full-on reversal.
Like most two candle patterns, when you see the Bullish Piercing Pattern,
The Bullish Counter Attack pattern is very similar to the Bullish Piercing Pattern, so much so that many people confuse the two. While they are technically different patterns, they are similar enough that confusing them would have minimal impact on the trade performance after the fact.
With the Bullish Counter Attack, the first candle is a long black candle. On the second day, the stock gaps down and then trades bullish. At the end of the day, the 2nd day’s white candle trades up to the same price (or very close to) as the previous day’s close.
Going back to our metaphor of battle, with the Bullish Counter Attack, think of it as though the bears have taken territory, but the bulls counter. At the end of the day, while the bulls didn’t “win” they held their ground and countered the attack.
On an end of day ticker tape, most would think the day was a loss with a little move, but as a candle trader, you can see the volatility. That long gap down and bullish trade back up signals the shift in momentum.
The Bullish Counter Attack is an excellent pattern. Identify them and trade accordingly when you see them. Like all candlestick patterns, I do not suggest taking a counter-trend trade with this signal; however, it is certainly a great signal to warn you that the previous bearish trend is losing some momentum, and a new bullish opportunity may be just around the corner.
When you see the Bullish Counter Attack:
Another popular pattern is the Bullish Harami. This pattern and it’s bearish cousin the “Bearish Harami” occurs frequently and is a surprisingly popular pattern despite a relatively poor history of playing out in an expected manner.
The Bullish Harami is characterized by a large, better than an average black candle, occurring at or near a support level after a bearish swing. The second candle is a smaller white candle (usually a spinning top) that occurs completely inside the previous day’s real body.
“Harami” means “pregnant” in Japanese, and as you can see in the image, it may be an appropriate name for this candle. The second candle in the pattern, completely inside the first candle, is an indication that the momentum is slowing down and potentially shifting.
Even though this is considered bullish, it is rather unreliable. Often it simply leads to a sideways move rather than a bullish reversal, and many times there is no change in the previous trend at all.
For me, when I see a Bullish Harami, I adjust stops and take note. But that’s about it. More often than not, I see it turning into a sideways move that may or may not lead to a reversal. Wait for more confirmation before actually trading this signal bullish.
One of my personal favorites is the Tweezer Bottom. In fact, it’s so great; it made my list of Top 5 Candlestick patterns to trade!
This two candle pattern may be one of the most misunderstood candle patterns for the simple reason that the definition is so broad, it incorporates a lot of variations, some of which are not that valuable.
Despite the broad definition and many possible variations, when you find the right variation of Tweezer bottoms, you will find them to be very reliable and predictive reversal patterns.
By definition, a Tweezer bottom is a 2 line candle formation that occurs at support after a bearish swing. The first candle is black, the second candle is white, and the opening price of the second candle matches the closing price of the first candle.
Based on that definition, any of the following candle formations qualify as a Tweezer bottom.
Unfortunately, many of those formations above will not play out well. If someone takes the literal definition and looks at any of the formations above as though it is a tweezer bottom about to reverse, the results will not be good and that trader will be very frustrated.
However, there is what I consider an ideal Tweezer Bottom formation, which I have personally found to be an excellent formation, one which consistently provides some very good reversal signals.
For the ideal tweezer bottom formation, look for a larger black candle (average size or larger) followed by a similar size white candle, with the opening of the second day matching the close of the first day.
This formation typically leads to very good results. When you find this formation at support, it is a very good reason to expect an imminent bullish swing.
When you see the Tweezer bottom in an ideal formation:
These last two patterns are by far my favorite two reversal signals. First up is the One-White Soldier.
I first discovered the One-White Soldier by a bit of a mistake and luck. This is not a popular pattern, yet it is an extremely predictive one. It started when I noticed the cousin to this pattern, the One-Black Crow pattern a few years ago.
I noticed several occurrences of trades where a large black candle would gap down at open from a large white candle, all at resistance.
Naturally, this pattern “looked” very bearish, but there was no mention of it in any candlestick literature I could find.
Then one day, I found it - buried deep in the research of one candlestick book was a little pattern called “One-Black Crow.” Finally! I had a name to attach to this fantastic candlestick pattern
Naturally, inverting the candles should reveal a bullish version, and before long, I discovered it too had a name: the One-White Soldier. Not a lot of people talk about this pattern, but those who do know it to be a very insightful pattern that offers some powerful predictions.
Here’s what it looks like:
To create the One-White Soldier, the stock has been in a bearish swing, and it reveals a strong black candle at or near support. Then, the next morning, the stock gaps up, and a large white candle is revealed.
This opening gap often goes unnoticed because there is not specifically “gap space” on the chart. Unless they are looking at an intraday chart, most traders miss this opening gap completely.
That opening gap is the very reason this is such an incredibly strong signal. When you see it - BEWARE!
I can not emphasize enough what a strong reversal signal this is. It’s not perfect, but it’s very good.
So how do you play it?
Here's what I typically do when I see a One-White Soldier:
Morning Star Reversal
The final pattern I want to share is the Morning Star Reversal. This pattern is a 3-candle pattern.
Like all of these patterns, the Morning Star Reversal needs to occur at support, after a bearish swing. The first candle is a strong bearish black candle. The second candle is a small spinning top (any color), and finally, the third candle is a white candle.
One of the reasons the morning star is a strong signal is because it is like the two candle reversals, but with an extra candle in the middle that is a spinning top. That spinning top is itself a reversal signal. It all combines to create an incredibly strong reversal signal.
In most circumstances, when you see this pattern, you want to:
Buying low and selling high is the holy grail of traders. Even in bearish market traders are still trying to find a stock to buy low and sell high. When you notice these bullish candlestick patterns, pay attention. They are very good signals, even if only for a short swing.
If you learn to identify these patterns, you are certain to lock in more profits, and you will likely find yourself getting into better bullish trades much earlier - trades that let you buy low and sell high. That is what you want after all, right?