Table of contents
Knowing patterns is vital to be able to make informed judgments in financial markets. Technical analysis, which traders and investors use, involves looking back at past market data to anticipate future price movements.
Chart patterns visually represent the behavior of a market enabling one to identify likely trends. Bullish homing pigeon pattern is one such pattern that indicates a possible uptrend in stock prices.
This article will talk about the meaning of bullish homing pigeon, followed by its formation and some examples for better understanding purposes.
What is the bullish homing pigeon pattern?
The Bullish Homing Pigeon Pattern is a bullish reversal candlestick pattern found in technical analysis. It consists of two candlesticks:
- The first one being a long bearish candle generally witnessed in a downtrend, followed by a smaller bullish one having almost the same open and close prices as the previous day’s bearish candle.
- The second candlestick is basically “hanging” within the body of the first candlestick as if it were returning to its nest just like a homing pigeon which has prompted its name.
This pattern indicates that there might be a change from bearish to bullish in market sentiment. It shows that buyers have taken over even after an initial selling pressure signaling that there can be a possible reversal of the downtrend.
Traders often interpret this as an indication for going long or exiting short positions already opened.
Example of bullish homing pigeon
On a price chart for a stock trading in the Indian market:
- Day 1: A long bearish candle forms, indicating a significant downward movement in the stock’s price. The candle’s range spans from ₹150 to ₹140.
- Day 2: A smaller bullish candle forms, opening near the previous day’s close at ₹142 and closing near its open at ₹148. This candle’s range is within the body of the previous day’s bearish candle, resembling a homing pigeon returning to its nest.
This pattern suggests that despite the initial selling pressure on Day 1, buyers stepped in on Day 2, leading to a potential reversal of the downtrend. Traders may interpret this pattern as a signal to consider entering long positions or closing out existing short positions, depending on other confirming factors and risk management considerations. Now, let’s take a closer look at the formation of the bullish homing pigeon pattern.
Formation of bullish homing pigeon pattern
The bullish homing pigeon pattern appears between two bearish candles. The second candle forms inside the first. Since this pattern starts bullish, the candles must establish a downward trend. That is enough evidence that there is a turn in the trend. Additionally, both candles are negative.
The bullish homing pigeon pattern must meet these two conditions.
- One bearish first candle
- The following one is also bearish but it is engulfed within the range of the first one.
This pattern almost suggests that there shall be bullish reversal. Both these candles will close completely. The opening prices will exceed their closing counterparts.
Also, traders may notice an upward reversal because of weak downslide. There are no profit targets on this bullishly homing pattern of a candlestick.
Confirmation of bullish homing pigeon pattern
The confirmation of a bullish homing pigeon pattern is an important step in validating the potential reversal signal. Here’s how it’s typically done:
- Next Candle: Traders often wait for the next candle after the pattern for confirmation of the direction.
- Bullish Confirmation: If the price moves above the open of the first or second candle, and especially if it closes there, the upward thrust provides evidence that a bullish reversal is underway.
- Bearish Confirmation: Conversely, if the next candle after the pattern sees the price drop, and especially if it closes below the close of the first or second candle, that selling indicates the price is more likely to continue dropping.
As with most candlestick patterns, the Bullish Homing Pigeon works best when used in conjunction with other technical indicators or chart patterns. It’s also important to consider the overall market trend and other factors before making a trading decision based on this pattern.
Interpreting the bullish homing pigeon
Now, let’s learn how to interpret it. In a bearish trend, investors often feel uncertain about the market’s direction, expecting further decline. This sentiment is reflected in the first candle of a bullish homing pigeon, which is long and bearish.
As the market continues to decline, some buying pressure begins to emerge. Investors anticipate a potential upward movement or at least a pullback, considering the prolonged downtrend. This optimism is reflected in the positive difference between the first and second candles.
However, it becomes evident that the buying pressure isn’t strong enough to sustain the market’s upward movement. Consequently, the second candle turns bearish. Despite this, bulls manage to keep the market within the range of the previous candle, signalling a potential bullish reversal.
Stop loss and price targets
Traders who set appropriate stop losses can benefit from market volatility. After the bullish homing pigeon signals a bullish reversal, there are two options for the trader for the stop loss target for bullish homing pigeon. They can place a stop loss below the low to enter a long position, or they may place a stop loss above the first candle and below the second.
However, this strategy doesn’t always apply. Some traders prefer to use a continuation indicator. They hold onto their trade until the price falls below the bullish homing pigeon pattern.
Then, they have two choices. They can enter a short position by setting a stop loss above the bullish homing pigeon pattern. Alternatively, they can set a stop loss just above the second candle.
Conclusion
The bullish homing pigeon pattern consists of two candlesticks and can signal either a potential upward reversal or a continuation of bearish trends, depending on market conditions.
Traders and analysts should verify the pattern’s reliability by examining trading volume and confirmation indicators, alongside considering current market conditions.
While bullish homing pigeon patterns provide valuable insights, it’s wise to complement them with other technical indicators and analyses for informed trading decisions.
If you’re eager to deepen your understanding, consider checking out StockGro.
FAQs
Look for two consecutive candlesticks: the first one should be a long bearish candle, followed by a smaller bullish candle with its body entirely within the range of the previous candle.
This pattern suggests that selling pressure is diminishing and buying interest is increasing, potentially signalling a reversal from a downtrend to an uptrend.
The name is derived from the resemblance of the two candlesticks to a homing pigeon, with the smaller bullish candle resembling the body of the pigeon and the larger bearish candle representing its wings.
While no pattern guarantees success, the Bullish Homing Pigeon Pattern can be a reliable indicator when confirmed with other technical analysis tools and market factors.
Traders may consider entering long positions or tightening stop-loss levels when they spot this pattern, anticipating a potential reversal and aiming to capitalize on the ensuing uptrend.