When it comes to stock trading, one of the most important things to know is how to read candlestick patterns. This is especially true when you’re trading in Hong Kong, where the market is volatile. While traders can use several candlestick patterns to predict price movements, bullish patterns are some of the most reliable.
Here are the most common bullish candlestick patterns and how to use them to your advantage when purchasing stocks in Hong Kong. For those interested, try it out here.
The Hammer
The first pattern is known as the “hammer.” This pattern forms when the market has been on a downtrend and then declines sharply on heavy volume. However, prices then rally back towards the opening price, closing near or at the day’s highs.
The long lower shadow on the hammer indicates that there are still many sellers in the market. However, prices managed to rally back and close near the day’s highs, showing significant buying pressure. This bullish sign suggests the market may be ready to turn around.
The Inverted Hammer
The inverted hammer is almost similar to the hammer but forms in an up-trending market. Again, prices decline sharply on the heavy volume before rallying back and closing near or at the day’s highs.
The long upper shadow on the inverted hammer indicates that many buyers are still in the market. However, prices managed to rally back and close near the day’s highs, showing significant buying pressure. This bullish sign suggests the market may be ready to turn around.
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The Morning Star
The morning star is a three-day candlestick pattern that forms after a downtrend. On the first day, a long black candlestick is followed by a short-lived rally. The third day sees another black candlestick, but this one gaps down from the previous day’s close.
The fact that prices can gap down on the third day shows that selling pressure is still intense. However, the longer-term trend may be ready to reverse since buyers were able to step in and push prices higher on the second day.
The Shooting Star
The shooting star is the opposite of the morning star and forms after an uptrend. On the first trading day, a long white candlestick is followed by a short-lived rally. The third day sees another white candlestick, but this one contrasts with the previous day’s close.
The fact that prices can rise on the third day shows that buying pressure is still intense. However, the longer-term trend may be ready to reverse since sellers were able to step in and push prices lower on the second day.
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The Bullish Engulfing Pattern
The bullish engulfing pattern runs over two days and is a candlestick pattern that can signal a reversal from a downtrend to an uptrend. On the first day, a small black candlestick is followed by a large white candlestick. The white candlestick should “engulf” the black candlestick, meaning it should be significantly larger.
The fact that the second day’s candlestick is much larger than the first day’s shows a shift in market sentiment. This bullish reversal suggests that the market may be ready to turn around.
How to use bullish candlestick patterns
First, looking for these candlestick patterns after a downtrend is essential, increasing the chances of the pattern signalling a reversal.
Second, it’s crucial to confirm the pattern with other technical indicators. For example, you might look for bullish divergences on a price chart or for the market to break out of a downward-sloping trendline.
Finally, it’s also essential to consider the overall market conditions before making any decisions. For example, if the overall market is in a strong uptrend, you might want to be more aggressive with your buy signals. However, if the market is in a choppy rangebound trading pattern, you might want to be more cautious.
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The bottom line
Remember, no single technical indicator is perfect. But combining multiple indicators can increase your chances of successful investments in Hong Kong stocks. Novice traders are advised to practice with a Saxo demo account before putting real money on the line.