Candlestick patterns can be traced back to the 18th century when a Japanese rice trader named Munehisa Homma developed a system of charting that used candlestick patterns to track the price movements of rice. Munehisa Homma used the patterns to help him make trading decisions and his techniques became popular among Japanese traders. Candlestick trading techniques were introduced to the West by an American trader called Steve Nison. He wrote a book called ‘Japanese Candlestick Charting Techniques’ in the early 90s where he covered a selection of candlestick patterns.
Two lesser-known patterns are called the bullish piercing pattern and the dark cloud cover. These two patterns are reversal patterns that can indicate a change in the trend and are well worth knowing about.
Bullish piercing pattern
The pattern consists of a long black (bearish) candlestick followed by a long white (bullish) candlestick that opens below the low of the previous day and closes above the midpoint of the previous day’s candlestick.
This is a sign that the bulls are starting to gain strength and may be able to take control of the market in the future. This pattern can be seen as a potential buying opportunity as it suggests that the bearish trend may be coming to an end. However, it should be remembered that ideally the pattern should be confirmed by other price action. Nevertheless, it can be a helpful pattern.
Dark cloud cover
This pattern is the bullish piercing pattern but in reverse. It is a potential sign that the recent uptrend has come to an end and a potential selling opportunity.
Look out for these patterns at potential tops and bottoms. When they are combined with changing macro fundamental news they have more significance. However, the overall market context should still be considered.