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Bullish And Bearish: Complete Guide With Chart Patterns

Bullish Patterns

 

Bullish Engulfing

A bullish engulfing pattern is a chart pattern that forms when a small black candlestick, showing a bearish trend, is followed the next day by a large white candlestick, showing a bullish trend, the body of which completely engulfs the body of the previous day’s candlestick. For a bullish engulfing pattern to form, the stock must open at a lower price on day 2 than it closed at on day 1.

 

Because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the white candlestick in a bullish engulfing pattern represents a day in which bears controlled the price of the stock in the morning only to have bulls decisively take over by the end of the day.

 

THINGS TO REMEMBER:

  • There should be a preceding downtrend
  • Stock must open at a lower price on day 2 than it closed at on day 1
  • Green candle completely engulfs the red candle

 

TRADING THE PATTERN:

  • Look for bottoms of continuous downtrends
  • A long position / buy should be placed on confirmation of trend reversal
  • Place a stop loss below lower green candle to avoid loss

 

CHARTS

Bullish Engulfing Chart

Bullish Engulfing Chart 2

 

The same principle applies to bearish version of Engulfing pattern. Set short position on trend reversal and place your stop-loss above the green candle.

Dragonfly doji

Dragonfly doji

Dragonfly Doji is a typical bullish reversal pattern usually found at the bottom of downtrends. It is easily recognizable and fairly relaible. Dragonfly Doji is created when the open, high and close are about the same price. The most important sign is the long lower shadow. The shadow implies that the market tested to find where demand was located and found it. Dragonfly Doji is very similar to The hammer pattern. (The Hammer has difference between the open and closing prices)

Dragonfly doji

THINGS TO REMEMBER:

  • The Dragonfly Doji must have a long lower shadow
  • Open / Close prices are nearly the same
  • There should be no/little upper shadow

 

TRADING THE PATTERN:

  • Look for bottoms of continuous downtrends
  • A long position / buy should be placed on confirmation of trend reversal
  • Put other indicators to work, that will help you identify the bottom of current trend

 

CHARTS

Dragonfly doji Chart

Dragonfly doji Chart 2

Dragonfly pattern confirming trend reversal.

The Hammer

hammer

The Hammer is a simple bullish reversal pattern made up of one candle and visually similar to Dragonfly Doji. The candle looks very much like hammer; has a long bottom shadow and short/no upper body.

 

THINGS TO REMEMBER:

  • The Hammer must have a long lower shadow
  • Lower wick should be two times greater than the size of the body
  • There should be no/little upper shadow
  • The color of the candle does not matter as long as shadow-to-body ratio is met

 

TRADING THE PATTERN:

  • Look for hammers in downtrends where they signalize trend reversal
  • Be cautious, wait for confirmation. What appears to be the Hammer may simply be another candle.
  • Put other indicators to work, that will help you identify the bottom of current trend

 

CHARTS

Hammer chart

Typical example of Hammer pattern reversing downtrends. Wait for another candle to be formed to verify the pattern.

Morning Star

Morning Star

Morning Star is a bullish sign following a downward trend. Fairly reliable, it consists of three bars, first bar is a tall red candlestick occuring within a downtrend, second bar red or green closing below the first bar (forming a gap) , and the third bar tall green candle, again forming a gap by opening above the middle candle.

 

The logic behind this pattern is:

The first large bearish candle represents a wave of sells. The middle “doji” candle represents indecision in the market. Finally, the long bullish candle represents the buyers taking control of the trade.

 

THINGS TO REMEMBER:

  • Morning Star can be difficult to properly locate but it is a strong reversal pattern
  • It must consist of three candles and must form gaps

 

TRADING THE PATTERN:

  • Look for volume. Traders usually don’t wait for confirmation on the third candle, thus buying early and inflating the volume. High volumes on the third candle may confirm the pattern
  • The larger the third candle (and the higher it moves in relation to the red candle), the larger the potential trend reversal.

 

CHARTS

Morning Star Chart

 

The opposite of Morning Star is the Evening star. It is a bearish pattern and is typically found within an uptrend, signalizing bearish trend to come.

Piercing Pattern

Piercing Pattern

Piercing Pattern is a set of two candles, bearish and bullish. Piercing pattern occurs when the bullish candle (on day 2) closes above the middle (50%) of the day 1’s bearish candle. Although still a bullish pattern, it is not so easy to spot and is less reliable than Bullish Engulfing, for instance. The bearish equivalent of Piercing pattern is Dark Cloud Cover.

THINGS TO REMEMBER:

  • There should be a downtrend prior to this pattern
  • The green candle on day 2 opens with a gap and closes above the middle of the red candle

 

TRADING THE PATTERN:

  • Look for potential bottom of downtrends where this pattern may form.
  • Wait for close of the bullish candle, place long position and stop-loss below the green candle.

 

CHARTS

Piercing Pattern chart

Three White Soldiers

Three White Soldiers predicts the reversal of a downtrend. This pattern consists of three consecutive long bullish candlesticks – they signalize a strong change in the market with the bulls taking over. Sometimes, this pattern may be preceded by other reversal patterns such as doji.

THINGS TO REMEMBER:

  • There should be a downtrend prior to this pattern, sometimes followed by another reversal pattern
  • Candles should not have very long shadows

TRADING THE PATTERN:

  • Be cautious when trading Three Soldiers. The big move in the market could cause RSI to report high values, thus making this indicator ineffective for further decisions. For these reasons, look out for other confirmations before taking position.

CHARTS

Three White Soldiers Chart

The bearish equivalent to 3 White Soldiers are the Three Black Crows.

The AB=CD

The AB=CD is a measured move down to correctly predict the market bottom and place orders. Predicting of those bottoms is typically done using Fibonacci ratios. ABCD patterns are commonly found in all markets and all sizes. The pattern consists of three legs, with two equal legs labelled AB and CD, together they form a zig-zag shape. AB=CD patterns can be bullish or bearish.

TRADING THE PATTERN:

  • The most important consideration is that BC projection should converge closely with the completion of the AB=CD.
  • AB=CD patterns are not always perfect. Be aware of this and stay vigilant in case your target isn’t met!
  • Try using more indicators that may suggest trend reversal. Zoom in for doji, engulfing and other bullish patterns.
  • Recommended reading for advanced AB=CD trading

 

CHARTS

abcd Chart

Finding the bottom of ABCD pattern by projection the length of A-B to C-D. The price is expected to go up after D has been reached

Ascending Triangle

Ascending Triangle

Ascending Triangle is a bullish formation that typically forms during an uptrend. They indicate accumulation and can lead to a strong breakout. It is reliable and can be very profitable, if traded correctly. For instance, ascending triangle patterns are commonly observed in cryptocurrency markets, where they signalize big moves. Ascending triangle is one of the three “triangle” patterns: The ascending triangle, The descending triangle, and The symmetrical triangle. The Ascending triangle forms resistance on top while closing in from the bottom.

THINGS TO REMEMBER:

  • An established trend should exist. Ascending triangle in a bearish market might not result in a upwards breakout
  • At least 2 reaction highs should form the top horizontal line, clearly indicating resistance
  • As the pattern develops, volume contracts. Upon breakout, volume should expand, confirming the breakout.

TRADING THE PATTERN:

  • Draw simple lines to watch the pattern develop. Any sudden movements may signalize breakout but also pattern not being valid
  • Do not trust short triangles as much as longer ones. Duration of a solid triangle could range from 1-3 months.
  • Watch closely the volume. It should dry up and expand drastically upon breakout.

CHARTS

Ascending Triangle Chart

Ascending triangle in BTC-USD market..

Bull Flag

Bull Flags predict good times to come. They are one of the most bullish patterns you can trade. As the name suggests, Bull Flag looks like a flag pole with a flag on the top of it. The pattern is formed when the price rises significantly in a short period of time and then consolidates for a short period of time..

 

THINGS TO REMEMBER:

  • An established upward trend should exist
  • Resistance of the flag should be clear and the flagpole must be longer than the flag

 

TRADING THE PATTERN:

  • Flag patterns require patience to wait for it to form; once you suspect a flag may be forming – wait for confirmation or breakout
  • Place stop-loss under the upper trendline on uptrends and lower trendline on downtrends
  • Measure your target price level using Fibonacci retracement/extension levels. Potential price targets are indicated by 1.27, 1.414 and 1.618

 

CHARTS

Picture: Bull flag currently forming in a market. Position should not be taken unless the pattern is confirmed by breaking out of the resistance.

Watch out for Bear Flags. They appear in bear markets as consolidation patterns and can falsely mark bottoms.

Cup and Handle

Cup and Handle 

Cup and Handle is a very strong bullish pattern resembling a cup in the shape of a “U” and handle which has a slight downward drift. Cup and Handle pattern can be found in many time scales but generally speaking, bigger cups are more reliable.

THINGS TO REMEMBER:

  • A cup itself is not complete pattern. Wait for handle to form and confirm the pattern.
  • Volume typically dries up on the right-hand side of the pattern.
  • The Cup & Handle pattern is a continuation pattern, not reversal.

TRADING THE PATTERN:

  • Place an order slightly above the trend line of the handle. Order should only be executed if the price breaks out the resistance. Do not fall into a false breakout by trading too aggressively.
  • Your target could be measured by the distance between the bottom of the cup and the pattern’s breakout level. (If the distance between the bottom of the cup and handle breakout level is 10, profit target is set 10 points above the handle. Place the stop below the handle for low risk tolerance.

CHARTS

Above an inverted Cup and Handle pattern – a bearish equivalent of C&H. Watch closely for the inverted “U” shape to avoid falling into a bull trap.

Double Bottom

The Double Bottom pattern is a pattern that’s for one fairly easy to find. It consists of two bottoms that form at a strong support level, signalizing strong trend change.

 

THINGS TO REMEMBER:

  • The Double Bottom pattern first hits the first bottom, retraces up to the Neckline and hitting the second bottom afterwards on the same support level.

 

TRADING THE PATTERN:

  • Although easy to find, the Double Bottom is not so easy to trade. Be patient and wait for confirmation. After hitting second bottom, the price should increase significantly, confirming the pattern. If this does not happen, there may not be a reversal.
  • The first and second bottom will form at a key support level. Significant differences between those two mean the pattern is not valid.
  • If you’re confident in your analysis, place an order above or at the neckline if the pattern confirms.

 

CHARTS

Rectangle Bullish

The Rectangle pattern is a classical continuation pattern firstly described in detail by Richard W. Schabacker. This article will be based on Schabacker’s interpretation of this pattern. The “Rectangle Formation” is typically a continuation pattern but may also be found in bottoms of trends and act as reversals. Yet, The Rectangle is much more often a continuation pattern than a reversal. Identification of this pattern is done by drawing two parallel lines on top and bottom of the formation (marking support & resistance levels). Rectangles represent well organized accumulation in a period of little public excitement. Long and already established rectangles have lesser chance of false-breaking out of the formation than short-term rectangles or rectangles in early development but false breakouts may happen. – A trader should be careful about entering prematurely in the market.

Notice a solid example of continuation Rectangle formation in DAX market in the picture above.

 

THINGS TO REMEMBER:

  • For continuation rectangle pattern, a prior trend should be established in the market.
  • Rectangles can sometimes be reversal patterns as well.
  • At least 4 touching points are required for Rectangle to be valid.
  • Some fake breakouts may occur during the setup, be careful.

 

TRADING THE PATTERN:

  • Target is calculated by measuring the height of the rectangle and applying it to the breakout price.
  • Watch for increased volume when the pattern breaks out of this formation. Low volume may signalize false or premature breakouts.
  • When the price breaks out of this pattern (upwards or else), the price may challenge the support / resistance level before making next move. Traders should be aware of this and not panic out of their positions.
  • Note: Rectangles are bullish and bearish. Same rules apply.

 

CHARTS

Another Rectangle formation – notice the big volume expansion upon breakout; this is a good signal and a buy opportunity.

Bearish Patterns

Dark Cloud Cover

The Dark Cloud Cover pattern forms a “dark” (red) cloud over the preceding bullish candle. The bulls push the price high at the open but later the bears take over and push the price lower significantly. This shows there may be a bearish trend reversal.

THINGS TO REMEMBER:

  • An existing bullish uptrend should be established
  • A gap needs to be present between the first and second candle
  • The bearish candle closes below 50% of the previous bullish candle

 

CHARTS

Bearish engulfing

Bearish engulfing is the “evil brother” to the Bullish Engulfing pattern. The logic behind this pattern is similar to its bullish equivalent. The pattern consists of a small white body that is contained within the followed large black candlestick.

 

THINGS TO REMEMBER:

  • The bearish candle completely “engulfs” the bullish one
  • There is typically a preceding uptrend to this pattern

 

TRADING THE PATTERN:

  • Wait for a next candle to form and make a decision according to its character.
  • For short-term trading, set stop-loss above the high of bearish candle and place a short position.

 

CHARTS

 

Gravestone Doji

Gravestone Doji is a type of “Doji” pattern, which signalizes bearish market reversal. This pattern can be found at the end of a downtrend but also at the end of an uptrend. It has a little to no body and a long upper shadow. The body can be either bullish or bearish but a red candle is more typical.

 

THINGS TO REMEMBER:

  • The Gravestone Doji has little-to-no body and a long upper shadow. The bottom shadow is either invisible or barely existent.

 

TRADING THE PATTERN:

  • The Gravestone Doji is not as reliable as other bearish patterns but it serves as a potential indicator of reversal, thus calls for closing long positions or selling.

 

CHARTS

Notice the forming Gravestone Doji on the top which may signalize the end of the current bullish trend.

shooting star

A shooting star is interpreted as a type of reversal pattern presaging a falling price. The Shooting Star looks exactly the same as the Inverted hammer, but instead of being found in a downtrend it is found in an uptrend. The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed but encountered selling pressure which drove prices back down.

THINGS TO REMEMBER:

  • The shooting star is found in an uptrend
  • The body can be either green or red

 

TRADING THE PATTERN:

  • Be patience and wait for the next candle to form. Once confirmed, place short position or sell.
  • The profit targets depend heavily on the current market – study its cycle and decide accordingly.

 

CHARTS

Three Black Crows

This pattern consists of three consecutive long-bodied candlesticks that have opened within the real body of the previous candle and closed lower than the previous candle. It is a bearish equivalent to Three white soldiers. The Three Black Crows pattern typically indicates the start of a bearish downtrend.

 

THINGS TO REMEMBER:

  • Three red candles next to each other must be present in the market to confirm this pattern
  • The candles should not have too much shadow

 

TRADING THE PATTERN:

  • This pattern is most accurate when the uptrend leading up to this pattern occurred with relatively low volume. Be aware of RSI indicator reporting oversold values.
  • Instead of exclusively looking at the pattern, analyze the details of the market and trends that are currently taking place.

CHARTS

head and shoulders (HS)

The head and shoulders (HS) is a reversal pattern signaling the prior trend is reversing, or has already reversed. A HS top is formed when the price makes a high, pulls back, makes a higher high, pulls back again, and makes another lower swing high. This creates three hills, the middle one being the highest (head). Connecting the left and right shoulder will form the neckline. A breakout occurs when the price reaches levels bellows support. The H&S pattern has proven to be one of the most reliable ones and is widely used in TA.

 

THINGS TO REMEMBER:

  • Three hills are formed in H&S with two pullbacks and one breakout at the end
  • The head always reaches the highest level, while shoulders reach approximately the same lower levels
  • H&S pattern is most often a reversal pattern – there must be a trend to be reversed in order for an H&S pattern to be valid.
  • There must be some symmetry to the shoulders in terms of duration or height.
  • The right and left shoulders must overlap – and the more overlap the better.

 

TRADING THE PATTERN:

  • The pattern is completed when the third shoulder exceedes the bottom neckline. When this happens, place short position.
  • Profit target for H&S is the distance from the highest point of the pattern (head) to the neckline subtracted from the neckline.
  • Trading H&S can be very profitable as well as trading bullish inverted H&S (also known as H&S bottom).

 

CHARTS

 

The picture above shows a standard way of entering in the market and setting a profit target. The stop-loss in this picture is marked a bit too high depending on the pattern duration. For 5-10 week patterns, your stop-loss will likely be much more close to the enter price.

Descending Triangle

The descending triangle is a bearish chart pattern used in technical analysis that is created by drawing one trendline that connects a series of lower highs and a second horizontal trendline that connects a series of lows. Descending triangles are a very popular chart pattern among traders because it clearly shows that the demand for an asset is weakening, and when the price breaks below the lower support, it is a clear indication that downside momentum is likely to continue or become even stronger.

 

THINGS TO REMEMBER:

  • Price should touch each trendline at least twice as distinct peaks or valleys.
  • Price must cross the pattern from trendline to trendline, nearly filling the available space.
  • Descending Triangle are generally bearish, but not always!

 

TRADING THE PATTERN:

  • Avoid descending triangles with abundant white space.
  • Wait for breakout! Some triangles like to turn bullish.
  • The pattern confirms as a valid one when price closes outside one of the trendlines.
  • Watch out for false breakouts.
  • A breakout should be accompanied with some volume expansion.
  • Target for trading descending triangles is either closest major support or the height of the triangle subtracted from the bottom of the triangle.

 

CHARTS

Double Top

The Double top is a bearish reversal pattern similar to Double Bottom but heading the opposite way. It consists of two consecutive peaks at a roughly same (resistance) level, with mild price consolidation in between.

 

THINGS TO REMEMBER:

  • Double top patterns occur in bullish markets and are sometimes tough to predict. However, once they are formed, these patterns reliably mark that the market situation is about to change.
  • What’s more important than the price reaching the same range two times is the consolidation period between the two tops. There must some kind of indecision building in the market accompanied by lower volume. The volume should also expand when the second top is formed. Make sure to read Richard W Schabacker’s documentation on this pattern (See Recommended Reading section).

 

TRADING THE PATTERN:

  • Open short position when the pattern is clearly confirmed by breaking out support level.
  • A safe target for trading Double Top is the nearest support level. At other times, ideal target lavel is equal to the height of the pattern subtracted from the breakout point.
  • The volume should increase after the second peak, indicating high sell-offs.

 

CHARTS

Bear Pennant

The Bear Pennant is a fairly easily recognizable bearish continuation pattern formed in an already established bear trend. It consists of a consolidation period, ends with a breakout. There are bull pennants as well, which work on the same principle.

 

THINGS TO REMEMBER:

  • Bear pennants (as well as Bull pennants) occur in established trends. They are not symmetrical triangles and also not descending triangles.
  • Bear pennant breaks out by continuing the already established trend. It does not mark reversal of an ongoing trend.
  • Volume: typically expanding by initial battle between bulls and bears, weakens as it progresses and expands once again during the breakout.

 

TRADING THE PATTERN:

  • Novice traders beware: Bear pennants can scare you off. Sudden move up in a downtrend does not necessarily mean the market found the bottom.
  • Don’t be scared of pennants. They perform a valuable service to you by marking a “midway” in an ongoing move.
  • Pennants are rather short. Zoom in, observe what’s happening on a smaller scale.

 

CHARTS

Bear pennant in XRP-BTC market. Notice the volume and the way the market behaves when the bulls leave the shop after the price breaks out. Pennants are very common as well as flags, make sure to study them properly (look at past markets) so you know how to trade these. Pennants are used for pyramiding – increasing leverage using unrealized profits.

Rising Wedge

The Rising Wedge is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. This pattern can function either as a reversal pattern or continuation pattern. In order to qualify as a reversal pattern, there must be a prior trend to reverse. The pattern consists of two major construction points, the upper resistance line and the lower support line. The upper resistance should show at least two highs to form the resistance line and at least two reaction lows are required to form the support.

THINGS TO REMEMBER:

  • Look for upper resistance and lower support to identify the Rising Wedge.
  • Volume will decline with rising price.
  • Although majorly bearish, this pattern can also breakout upwards. (Around 70% of the time the pattern closes downward.
  • The pattern isn’t confirmed as bearish until the price breaks in a convincing way.

 

TRADING THE PATTERN:

  • For downward breakouts, the lower point of the pattern is the target.
  • Before taking position, wait for the price to close outside one of the trendlines.
  • Patterns with wider body perform better than narrow ones.

 

CHARTS