Picture this scenario…
You see a bullish chart pattern happening and you want to go Long.
But just as you’re about to enter into a trade, you see a candlestick pattern that you forgot the name to.
So you sit there wondering whether this is a valid candlestick entry or not.
And because of that, you didn’t enter the trade.
Instead, you sat there and watched the market go up without you.
But it’s not your fault because of the dozens of candlestick patterns that the trading “gurus” are telling you to remember.
So I’m going to clear your confusion once and for all…
And let you know that you don’t need to memorize every candlestick pattern…
And you definitely do NOT need to memorize their names.
Instead, all you need to remember are just 3 bullish candlestick patterns to go Long.
More importantly, you’ll understand the psychology behind these 3 candlesticks so you will never be confused as to whether you should go Long or not.
How to Read A Candlestick the Right Way
The diagram above shows you the fundamentals of how to read a candlestick.
The reason why we want to know how to read a candlestick pattern properly is that they tell us about the price action that’s happening in the market.
When you understand the price action, you would be able to read the market better.
And that will guide your trading decisions.
Now, there’s a dangerous teaching that’s going on the internet by many fake trading “gurus”…
These self-proclaimed “gurus” are telling you that when the close is higher than the open, it’s considered a bullish candlestick…
And when the close is lower than the open, it’s considered a bearish candlestick.
That’s simply not true.
Whether a candlestick is bullish or not depends on the context of the candlestick, not the color of the body.
And by “context”, I mean just two things:
- The length of the body relative to the candlestick’s length.
- The location of the body on the candlestick.
Understanding the Candlestick Pattern’s Context
I want you to think of the candlestick pattern’s formation like the Tug of War.
During the match, there is a constant struggle between two sides.
Initially, one side might be winning but then the other side might come back and eventually win it.
This is the same struggle that’s happening on each candlestick.
And each candlestick tells us the story of this struggle.
So how do you tell whether a candlestick is bullish, bearish or neutral?
By using two methods.
Method #1: Body Length
The first way is by seeing the body length relative to the candlestick’s length.
If the candlestick has a really long body with short wicks…
Then it comes down to whether the close is higher or lower than the open.
If it has a close above the open and it closes above the halfway mark of the candlestick, then it’s a bullish candlestick pattern.
And if it has a close below the close and it closes below the halfway mark, then it’s a bearish candlestick pattern.
As long as the body is bigger than 50 percent of the candlestick length, we can apply this rule.
Here are a few variations:
As you can see, as long as the body closes above the halfway mark of the candlestick, it’s bullish.
And as long as the body closes below the halfway mark, it’s bearish.
It’s like a Tug of War.
The game starts with a ribbon tied at the halfway mark of the rope with two teams on both sides of it.
And when the whistle is blown to end the game, the side where the ribbon is in will be the winner.
That’s the same with candlesticks with big bodies.
But what if it has a small body?
Then it comes down to the next method…
Method #2: Body Location
The body’s location on the candlestick comes into play when the body is less than half the size of the candlestick’s length.
In general, there are three locations where the body can be on the candlestick.
If the body closes above the halfway mark, it’s considered bullish.
If the body closes around the halfway mark, it’s considered neutral or indecision in the market.
And if the body closes below the halfway mark, it’s considered bearish.
And if you noticed, there are two colors on the bodies.
It means that it doesn’t matter whether the color of the body is bullish or bearish.
What matters is where the body is located.
So even if the candlestick has a bearish body but it is formed above the halfway mark, it’s considered bullish.
Likewise, if the candlestick has a bullish body but it is formed below the halfway mark, it’s considered bearish.
Now that you know exactly how to read a candlestick and how to interpret whether it’s bullish, bearish or neutral, let’s move on to…
The Only 3 Bullish Candlestick Patterns You Need to Know
If you’re confused by all the dozens of different candlestick patterns out there with weird names, I get it.
From the Spinning Top to the Inverted Hammer, to the Gravestone Doji and Long-Legged Doji, there is just no end to these candlestick names.
Even I do not know every single name of every candlestick pattern out there.
Here’s the good news…
You don’t need to.
When I was a prop trader for 4+ years, not once were we taught about candlestick patterns.
And not once did traders talk about candlestick patterns as well.
We only talk about order flow.
That means identifying the big players in the order book and seeing the traded prices.
But now as retail traders, we don’t have that information and we don’t need that information because we are trading on a larger time frame.
And that’s where candlestick patterns come in.
Candlestick patterns translate what is happening in the market between buyers and sellers.
However, you don’t need to “memorize” the names of the different candles pattern…
Instead, you want to understand the psychology behind its formation.
So to go Long, there are only 3 bullish candlestick patterns that you need to look out for.
And that’s more than enough to be consistently profitable.
Only once you’ve mastered these 3 candlestick patterns, then you can go learn the others.
But start with these 3 first.
1) Bullish Pin Bar
The first bullish candlestick pattern that you want to remember is the Bullish Pin Bar.
It is a one-candlestick pattern and signifies a reversal of price action.
It has a body that is less than 50 percent of the length of the whole candlestick.
And its body is located above the halfway mark signifying that the bulls are well in control in this candlestick.
Here are the different variations of the Bullish Pin Bar:
By now you should immediately recognize that this is a very bullish signal.
Now, the Bullish Pin Bar can be located pretty much everywhere on the chart.
And while it can be tempting to trade them all…
You definitely don’t want to enter a trade every single time it appears.
There are many traders out there doing this and some people even teaching you to do this.
Don’t do it.
You will lose your account faster than you can say “Pin Bar”.
Instead, you only want to trade these Bullish Pin Bars in context with what the market is doing.
Since the Pin Bar is bullish, you only want to go Long.
So you want to look for chart patterns that are bullish continuation patterns or bullish reversal patterns.
Then use the Bullish Pin Bar as the trigger to get into the trade.
2) Bullish Piercing Pattern
The Bullish Piercing Pattern is a two-candlestick pattern and also indicates a reversal of price action.
The first candlestick in this pattern is a bearish candlestick.
The second candlestick is a bullish candlestick that closes above the halfway mark of the first candlestick.
This signifies that although the bears were in control earlier, the bulls came back and took over control as it pushed the bears back above the halfway mark.
Here’s something interesting about the Bullish Piercing Pattern…
If you combine the two candlesticks of this pattern, you actually get a Bullish Pin Bar:
In fact, if you see a Bullish Piercing Pattern on the chart, go to a higher timeframe that is twice higher.
So for example, if you see the Bullish Piercing Pattern on the 30-minute chart…
Then on the 1-hour chart, it could be a Bullish Pin Bar.
And if you recall what I mentioned earlier on candlesticks with bodies smaller than half of the candlestick’s length…
The color of the body doesn’t matter.
So although the image above shows a bearish body…
It’s located above the halfway mark and that is a bullish sign.
3) Bullish Engulfing Pattern
The last bullish candlestick pattern that you need to know is called the Bullish Engulfing Pattern.
It’s also a two-candlestick pattern and signifies a reversal in price action as well.
Like the Bullish Piercing Pattern, the Bullish Engulfing Pattern also has its first candlestick as a bearish candlestick and the second candlestick as a bullish candlestick.
The only difference is that the second candlestick is much bigger than the first candlestick.
Hence the name “engulfing”.
Technicality-wise, the second candlestick must close above the body of the first candlestick.
And the length of the candlestick must be longer than the length of the first candlestick.
The Bullish Engulfing Pattern is a sign of overwhelming bullishness as the bulls regained back all lost ground in the first candlestick and more.
That’s why this candlestick pattern is a very popular one among traders.
And here’s also something interesting about this pattern…
If you combine the two candlesticks just like the Bullish Piercing Pattern…
You also get the Bullish Pin Bar:
So in essence, all the 3 bullish candlestick patterns are really just one candlestick pattern…
And that is the Bullish Pin Bar.
Now that you know the candlestick patterns, how do you enter into a trade using them?
How to Enter Into A Trade
So first of all, what’s important to realize is that you NEVER enter a trade just off any candlestick pattern.
Rather, these entry methods are to be used only after you have a trade setup.
Only then will these entry methods come into play.
Now, there are 3 ways to enter into a trade using these bullish candlestick patterns:
Method #1: At the Close
This is the most aggressive entry method of the three.
Basically, you enter into a trade once the candlestick bar closes.
To enter a trade at the close means that you would have to be watching the charts just before the candlestick bar closes.
So let’s say you are trading the 1-hour chart.
What this means is that you would have to be monitoring your chart every hour.
This way, you would know when the bullish candlestick patterns are about to form and you can get into a trade.
If you’re trading the 4-hour chart, then you would only need to monitor your chart only once every 4 hours.
But if you’re trading the lower timeframes like the 30-minute, 15-minute, or even the 5-minute chart…
You’d practically be glued to your screen in order to catch the close of each candlestick.
And if you miss the close of the candlestick, the market might have already gone up without you in the trade.
But of course, it’s also possible for you to get the same entry price even if you missed the entry at the close if the market comes back to the same point.
However, most of the time if it does come back, there’s a chance you’d only be catching the losing trades as the winning trades would many times just go up and not come back.
So unless you have lots of time on your hands to stare at the charts constantly…
It would be better to trade a higher timeframe for this entry method.
Method #2: Break of High
To go Long with this entry method, once the candlestick closes, you place a Buy Stop Order above the high of the candlestick.
With this method, it’s more conservative than the first entry method and is the most common entry method traders use.
You’d also need to be able to monitor the close of the bar so that you can place your order.
For this entry method, we use a Buy Stop Order.
What a Buy Stop Order does is that when the market hits that level, it will trigger an order to buy at market (which means to buy at the best available price).
So depending on how quickly the market goes above this level, there can be negative slippage.
With negative slippage, you get filled at a worse price.
So for example, if you place a Buy Stop Order at 1.0000, with negative slippage it might fill you at 1.0001.
This is the opposite of Limit Orders where you can get a positive slippage.
That means if you place a Buy Limite Order at 1.000, with positive slippage you might get filled at 0.9999.
With this method, there’s not as much rush to place your order compared to the first entry method where you have to be ready to click the buy button the moment the candlestick closes.
Now, if you take a look at the Bullish Piercing Pattern…
You might be wondering why I chose to place the Buy Stop Order above the first candlestick, and not the second candlestick.
And the reason is that, if you recall, when you combine both candlesticks it’s a Bullish Pin Bar.
So in the Bullish Engulfing Pattern, if you combine both candlesticks to become a Bullish Pin Bar…
The entry is the same as the original Bullish Pin Bar as shown on the left-hand side of the image.
Therefore to be consistent with the entry on the Bullish Piercing Pattern, the Buy Stop Order is placed above the combined high of the two candlesticks.
Now, of course, it’s also viable to place the Buy Stop Order above the high of the second candlestick.
But that’s a trader’s preference.
To me, it makes more logical sense to place the Buy Stop Order above the high of the first candlestick.
Method #3: Close Above the High
The last entry method is the most conservative of all…
Because we wait for the market to close above the high of the 3 bullish candlestick patterns before going Long.
This is my preferred entry method because this entry has an added confirmation that the bullish candlestick pattern is headed in the right direction.
However, there’s a downside to this entry method…
And that is the relatively bad risk-to-reward ratio compared to the other two entry methods.
Because of that, I do not immediately enter into a trade right when the bar after the bullish candlestick pattern closes above it.
Instead, I use a Buy Limit Order below the close to get a better entry and thus risk-to-reward ratio.
To explain this in detail, you first need to understand the risk-to-reward ratio for each of the entries.
Risk-to-Reward Ratio
Of the 3 entry methods, the first method would have the best risk-to-reward ratio as you can see in the diagram below:
For this diagram, I used a Bullish Pin Bar with a bearish body to illustrate the distinct difference between the risk-to-reward ratios for the 3 entry methods.
As you can see, the first entry method has the greatest biggest risk-to-reward ratio, followed by the second entry method, then the third entry method.
However, there is a trade-off for having a better risk-to-reward ratio…
And that is that there will be more frequent stop-outs.
For example, the first entry method may have gotten an early entry into the trade…
But if the market reverses immediately and hits the Stop Loss, then the second and third entry method wouldn’t even get an entry.
So this is a trade-off that you might want to balance out.
What I like to do is use the third entry method, but instead of entering immediately at the close, I place a Buy Limit Order below it.
So for example, if the high of the Bullish Pin Bar is 1.1000, and the next candlestick closes above it at 1.1020…
I’d place a Buy Limit Order below it at 1.1010.
This way, I’d get a better risk-to-reward ratio.
At the same time, I’d also have a more conservative entry that has lesser stop-outs.
However, the only downside is that the market may never come down to my Buy Limit Order and just keeps going up.
So it ultimately comes down to you as the trader to decide which suits your trading style better.
Your Turn
Now that you know these 3 bullish candlestick patterns, it’s time to put them into practice.
Go to your charts and see if you can identify these 3 candlestick patterns.
Then using a demo account, try out the 3 different entry methods and see which one is more suitable to your trading style.
Remember, these entry methods are not trading setups.
Instead, these 3 bullish candlestick patterns only serve as a trigger to go Long with your setup.
We always trade the chart patterns first, then use the candlestick patterns to confirm we have an entry.
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