Top Bullish Patterns Every Trader Must Know

CA Manish Singh: 
Hello everyone, and welcome to Chapter 5. Today we will learn how a combination of candlesticks forms specific bullish reversal patterns. In the next chapter, we will discuss their bearish counterparts. 

Many patterns have the same names in both bullish and bearish contexts, but their interpretation and trade decisions differ. Your job is to understand the structure of each pattern and the probable action you need to take when you see it forming on the chart. 

Patterns may not always look identical in every chart, but with consistent practice, if you review 100 charts a day, you will learn to identify them quickly. 

Let us begin with the first pattern. 

1. Bullish Engulfing Pattern 

CA Manish Singh: 
A Bullish Engulfing Pattern typically appears during a downtrend. The market is falling continuously, forming red candles one after another. 

The pattern forms when: 

• A red candle appears in the downtrend 

• It is followed by a much larger green candle 

• The green candle opens lower but closes above the previous candle’s close 

This strong green candle is usually Marubozu-like, meaning it has a full body with minimal wick. 

The size is important: 

• The green candle is almost double or more the size of the previous red candle 

• It completely engulfs the body of the red candle 

• Sometimes, it even covers the range of two previous red candles 

Why this signals reversal 

This single candle shifts sentiment from bearish to bullish. 
Short sellers see the large green candle and their stop-losses get triggered. 
When they exit, additional buying pressure pushes the price upward. 

Trade Setup 

You may consider: 

• Stop-loss: below the low of the engulfing green candle 

• Entry: above the high of the engulfing candle 

• Trail the stop-loss candle-by-candle as long as the market moves up 

This is the Bullish Engulfing Pattern. 

2. Bullish Harami Pattern 

CA Manish Singh: 
The second pattern is the Bullish Harami Pattern. 

Here, the structure is slightly different: 

• The first candle is a large red candle, often Marubozu 

• The next candle is a small green candle 

• The green candle forms within the body of the large red candle 

• Typically, the green candle is about half the size of the red candle, or slightly larger 

Interpretation 

Many traders who entered fresh short positions inside the large red candle will see their stop-losses triggered when the small green candle forms. This creates buying pressure and hints at a possible trend reversal. 

Confirmation 

A Bullish Harami is confirmed if the next candle after the small green candle also closes green. 

So this setup usually involves three candles: 

1. Big red candle 

2. Small green candle 

3. Another green candle confirming reversal 

3. Piercing Line Pattern 

CA Manish Singh: 
Now let us discuss the Piercing Line Pattern. 
This formation consists of two large candles. 

Structure: 

• First candle: a large red candle 

• Second candle: a large green candle 

The key condition: 
The green candle must close above the 50 percent level of the previous red candle. 

Example 

If the red candle has: 

• High: ₹50 

• Low: ₹40 

• Midpoint: ₹45 

For a valid piercing line pattern, the green candle must close above ₹45. 

Often the green candle opens lower, for example at ₹38, but rises sharply and closes above the halfway mark. 

Why this works 

When a red candle is large, traders usually place their stop-losses around the middle of the candle, not at the extreme top. 
So when the green candle closes above 50 percent: 

• A majority of stop-losses get triggered 

• Short sellers exit 

• Buying pressure increases 

• Market reverses upward 

This is a strong bullish reversal signal. 

4. Morning Star Pattern 

CA Manish Singh: 
The next pattern is the Morning Star Pattern, a powerful three-candle reversal setup. 

Structure: 

1. Large red candle 

2. Small green candle (the "star") 

3. Large green candle 

Together, these candles form a V-shaped structure. 

Interpretation 

• The large red candle shows strong selling 

• The small green candle shows selling weakness 

• The large green candle shows strong buying and confirms reversal 

Trade Setup 

Traders often: 

• Place stop-loss below the low of the small green candle 

• Enter long positions once price moves above the high of the large green candle 

This is the Morning Star Pattern. 

Important Note: The Need for Confirmation 

For all patterns discussed: 
The next candle after the pattern offers additional confirmation. 

Waiting for confirmation increases the probability of success in the trade. 

Summary and Takeaways 

• Bullish reversal patterns show a shift from selling pressure to buying interest. 

• Key patterns covered: 

• Bullish Engulfing 

• Bullish Harami 

• Piercing Line 

• Morning Star 

• Stop-losses are usually placed below the pattern’s low. 

• Confirmation strengthens the signal. 

• Consistent practice helps identify these patterns quickly in real charts. 

Please revise this chapter, as the same patterns will appear again when we discuss their bearish versions. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.