The Bullish engulfing candlestick is a type of multiple candlestick pattern that tends to signal a reversal of the ongoing trend in the market.
This candlestick pattern involves two candles with the latter candle ‘engulfing’ the entire body of the prior candle. The engulfing candlestick can be bullish or bearish based on where it forms in relation to the ongoing trend.
Many traders will use this candlestick pattern to identify price reversals and continuations to support their trading strategies.
What is Bullish Engulfing Pattern?
The bullish engulfing candle appears at the bottom of a downtrend and indicates a surge in buying pressure. The bullish engulfing pattern often triggers a reversal in trend as more buyers enter the market to drive prices up further. The pattern involves two candles with the second candle completely engulfing the body of the previous red candle.
The image below depicts the bullish engulfing pattern appearing at the bottom of a downtrend.
Formation of Bullish Engulfing Patterns:
For a bullish engulfing pattern to form, the stock must open at a lower price on Day 2 than it closed at on Day 1. If the price did not gap down, the body of the Green candlestick would not have a chance to engulf the body of the previous day’s red candlestick.
Because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the green candlestick in a bullish engulfing pattern represents a day in which bears controlled the price of the stock in the morning only to have bulls decisively take over by the end of the day.
The green candlestick of a bullish engulfing pattern typically has a small upper wick, if any. That means the stock closed at or near its highest price, suggesting that the day ended while the price was still surging upward.
This lack of an upper wick makes it more likely that the next day will produce another green candlestick that will close higher than the bullish engulfing pattern closed, though it’s also possible that the next day will produce a red candlestick after gapping up at the opening. Because bullish engulfing patterns tend to signify trend reversals, analysts pay particular attention to them.
What do Bullish Engulfing Patterns tell you?
The bullish candlestick tells traders that buyers are in full control of the market, following a previous bearish run. It is often seen as a signal to buy the market – known as going long – to take advantage of the market reversal. The bullish pattern is also a sign for those in a short position to consider closing their trade.
Although the wicks of the candles are not as important as the bodies for an engulfing pattern, the second candle in a bullish engulfing can provide a good indication of where to place a stop-loss for a long position. This is because it shows the minimum price someone is willing to accept in exchange for an asset at that given point in time. So, if the current uptrend does reverse, you can see a clear exit point for your position.
Bullish Engulfing Pattern vs. Bearish Engulfing Pattern
These two patterns are opposites of one another. A bearish engulfing pattern occurs after a price moves higher and indicates lower prices to come. Here, the first candle, in the two-candle pattern, is an up candle. The second candle is a larger down candle, with a real body that fully engulfs the smaller up candle.
Below is a summary of the main differences between the bullish and bearish engulfing patterns.
Limitations of Using Bullish Engulfing Patterns
A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend; however, they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.
The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.
Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don’t provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.
- The Bullish engulfing candlestick involves two candles with the latter candle ‘engulfing’ the entire body of the prior candle.
- The bullish engulfing candle signals reversal of a downtrend and indicates a rise in buying pressure when it appears at the bottom of a downtrend.
- A bullish engulfing pattern is a candlestick pattern that forms when a small red candlestick is followed the next day by a large green candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
- Bullish engulfing candlestick is a lagging indicator, meaning they give the signal to enter a trade after the price movement has occurred.