What Is A Bullish Reversal Pattern?
Identifying bullish reversal patterns is an easy way to generate profits in the stock market by buying stocks after they have gone up significantly from lows and selling them back once they have gone down from highs.
In other words, this is a cyclical pattern that will repeat itself repeatedly in the stock market. However, it’s important to note that bullish reversal patterns do not necessarily mean the market’s direction has changed.
If a stock has made a series of higher lows and higher highs – which is what we want for a bullish reversal –but it’s still trading below its 200-day moving average, that does not necessarily mean it is on its way up.
On the contrary, you can use the 200-day moving average to tell you when to sell a stock and not rebuy it. The 200-day moving average is an extended version of Elliott Waves Theory, which describes a market pattern that involves waves of price movement separated by brief pauses.
How To Spot A Bullish Reversal Pattern Using The Morning Star Candlestick Pattern
In other words, this means you want to predict when the stock will go up and when it will go down. A great way to tell when the market is only in bearish sentiment is when the morning star candlestick pattern presents itself.
The morning star pattern is at its lowest point of trading, and then it has a little bit of an uptick before returning down to finish trading even lower than the first time. This pattern usually indicates that buyers are becoming more interested than sellers and will likely revert soon.
The morning star pattern is a reversal pattern that appears in the chart as a Doji, which means that there is no clear direction of the trend for the market. The pattern comes after two large and bullish candles and signals that something unusual happened.
The morning star pattern appears in red as a vertical line on the chart, with one day’s worth of vertical bars.
The morning star pattern appears at the bottom of a downtrend.
Its characteristics are an indecisive candle where the price opens at or near its highest point, rallies to its high point, but closes below the midpoint. It signals that buyers are becoming more aggressive in bidding prices up and can also be a precursor to an actual reversal.
It is an essential pattern that traders should always watch out for as it helps you identify potential turning points in the stock market.
In this article, you’ll learn how to spot bullish reversal patterns using the morning star pattern and what conditions it takes for the pattern to occur.
A bullish reversal pattern is different from a bearish reversal pattern. If a stock breaks through the resistance level and then reverses, it’s considered a bullish reversal pattern.
For example, if a stock breaks through the resistance level after declining for three consecutive days, it will form a bullish reversal pattern that shows green candlesticks on its chart.
It means that the stock is likely to show growth in either direction.
It is essential to focus on the market trend since a bullish reversal pattern will show per the market trend.
For instance, if a stock declines for three consecutive days while the overall market is in an uptrend, it will likely break through its resistance level and reverse.
However, if the overall market is in a downtrend and the stock declines for three consecutive days, then it’s unlikely that this stock will reverse.
Investors should always focus on the market trend and not on individual stocks. Experienced traders can determine the overall market trend by closely looking at the patterns occurring throughout the day.
Here’s how to spot this pattern: The first thing you will notice about this pattern is that it only appears once we have a stock that has declined for three consecutive days in a row.
We’ll then look for a candlestick that appears on the fourth day; it should be green in colour. It is known as a morning star pattern, as it appears on the fourth day.
The morning star pattern shows that the stock will likely grow in either direction since it has reversed on the fourth day of its decline.
The morning star pattern will result in an uptrend seven out of 10 times. However, that is not to say that the other three times will not result in an uptrend.
Read more: Risks of Using the Dragonfly Doji Candlestick?
It’s essential to understand that the pattern can vary in time. The first candle can also be any colour and be of any length. Just make sure it is an elongated candlestick.
The second candle is what identifies the morning star. This second candle will typically have a large red body and be short, but not so short that it becomes a Doji.
It should close at or near its high, depending on the trend beforehand. The third and final candle in this pattern can be white and short or long, depending on the market conditions.
To spot a bullish reversal using the morning star candlestick pattern, you must first check to ensure an actual uptrend is occurring. Once you see the uptrend, look for a pullback or consolidation in price action.
The first candle should then be a “long” candle with an elongated body. After this candle, you should see a short or white candle that is bargain priced.
You may see some smaller candlesticks that are also short or white, but the morning star candle will be more significant. This candle must also close near or at its high.