Candlestick patterns are one of the most widely used and diverse tools in trading forex or other financial markets. One of these patterns is the bullish engulfing candlestick pattern, which is considered a strong bullish reversal signal.
Learning this candlestick pattern, in addition to other patterns in general, can play a key role in starting your journey as a successful trader. This blog is therefore dedicated to bullish engulfing candlestick patterns, their meaning, how you can use them, and more. By the end of this article, you’ll be able to:
- Identify and confirm bullish engulfing candle patterns;
- Interpret bullish engulfing candlestick pattern’s meaning;
- Set a trading strategy for bullish engulfing patterns.
There will also be 9 expert trading tips that can elevate your game when it comes to bullish engulfing candlestick patterns. If this sounds interesting to you, then you should definitely keep on reading.
What Is a Bullish Engulfing Candlestick Pattern?
A bullish engulfing candlestick pattern consists of two candles. The first candle is a smaller bearish candle (usually shown in red or black, and navy blue in this blog). The second candle, the body of which fully engulfs the first candle’s body, is bullish (usually shown in green or white, and orange in this blog). What we mean by “fully engulfing” the first candle is that the second candle opens lower than the previous candle’s close and closes above its open price. That way, the entirety of the first candle’s body overlaps with some part of the second candle.
As you see in the picture below, a bullish engulfing candlestick pattern has formed at the end of a downtrend. There is a rather small bearish candle, followed by a bullish candle. The bullish candle opens below the previous candle’s close, and the price starts increasing from there. It rallies until the bullish candle closes above its bearish peer’s open price.
How to Interpret a Bullish Engulfing Candlestick Pattern?
Bullish engulfing candlestick patterns are usually a signal for an upward trend reversal. They normally form at the end of well-established downtrends, signaling a potential change in the market sentiment.
When looking at bullish engulfing candlestick patterns from a supply and demand perspective, you’ll have a high supply level and a rather low demand level for the asset, resulting in a desire to sell the asset and go short. This creates a downward trend, which establishes the bears’ dominance over the market. Following the downtrend, another bearish candle forms, marking the beginning of the bullish engulfing pattern.
Of course, you can’t say for sure that a random down candle is the first part of this pattern, until the second candle forms the next day and engulfs it. For this reason, bullish engulfing candlestick patterns are considered lagging patterns that can only be recognized after the price movements have finished.
In any case, the second candle forms, gapping down from the previous candle’s close level. This gap indicates that the bears’ control over the market has continued, dropping the prices lower than the down candle’s close.
Despite this initial power, bulls enter the market and push the price up, eventually closing the candle above the previous candle’s open. And that is how a bullish engulfing pattern forms. Keep in mind that the second candle of this two-candle reversal pattern usually has a small or absent upper shadow, indicating that prices would have continued to rise had the trading day not ended.
Identifying a Bullish Engulfing Candlestick Pattern
Now that you’re better familiarized with bullish engulfing candlestick patterns and their meaning, it’s time to learn to identify them in a real price chart. To do so, you need to check for some factors:
- Look for a downtrend: There should be a prolonged downtrend before a bullish engulfing candlestick pattern forms.
- Find a bearish candlestick: Find a bearish candlestick that is followed by a large bullish candle. Mark the candle’s open and close price levels.
- Check the following bullish candle: As mentioned, your bearish candle should be followed by a larger bullish candle. Check the up candle’s body and ensure it opens below the previous candle’s close and closes above its open.
Confirming a Bullish Engulfing Candlestick Pattern
The next step is to confirm the trend reversal signaled by the bullish engulfing candlestick pattern. To do so, you can follow the steps below:
- Check the preceding and following candles: This goes with the whole prolonged downtrend shebang. So, you should look for bearish candles preceding the first candle of your bullish engulfing pattern. Additionally, the following candle after the bullish engulfing candle should also be bullish and close above the previous candle’s close. Also, the more candles the bullish candle engulfs, the stronger the reversal signal.
- Throw other technical indicators in the mix: You can use other technical indicators such as the relative strength index (RSI), moving average convergence divergence (MACD), and stochastic oscillators to see if they confirm the trend reversal signal as well.
- Utilize price chart pattern: Additionally, you can use price chart patterns such as double bottoms or bearish wedges to confirm bullish engulfing reversal candlestick patterns.
Bullish Engulfing Candlestick Pattern vs Bearish Engulfing Candlestick Pattern
Generally, there are two types of engulfing candlestick patterns: bullish and bearish. While the names are pretty self-explanatory, we will quickly overview each of their features in this section.
First, there is the bullish engulfing candlestick pattern, which we just talked about in detail. It forms after a significant price decline, with a bullish candle that engulfs its previous bearish candle. It’s a signal for an upward trend reversal.
There is also a bearish engulfing candlestick pattern, which can be considered as the polar opposite of the bullish version. It forms at the end of prolonged uptrends, with a large bearish candle that fully engulfs its previous, bullish candle. The bearish engulfing candlestick pattern is a downward trend reversal signal, which can be confirmed with other technical indicators and price chart patterns.
Trading With Bullish Engulfing Candlestick Patterns
If you’ve made it this far, congrats! You just put the basics behind you and are now about to learn what you initially came here for: “How can you trade bullish engulfing candlestick patterns and make money off of them?”
While there is no absolute, bullet-proof strategy for trading in any market and with any tool, there are some steps you can take that improve your chances of succeeding in your trades. Below, you’ll have a comprehensive tutorial on how you can trade bullish engulfing candlestick patterns.
1- Identify the Bullish Engulfing Pattern
The first step in trading a bullish engulfing candlestick pattern is recognizing it. Shocker, we know. Still, it’s kinda the most important part of trading with bullish engulfing candles! This is the reason why there was a whole section for identifying bullish engulfing candlestick patterns above, to give you a checklist to make sure you’re not mistaking other candles with this pattern. So, if you skipped that part, you should jump back up and read it before we move on to the next step.
2- Define Support and Resistance Levels
Now, it’s time to actually learn new things. Your next step is to define your support and resistance levels. What are support and resistance levels, you ask? They are price levels that the assets bounce off of. Basically, a support level is where the price stops dropping, while a resistance level is where the price ceases to increase. Both these levels act as factors that keep the market prices in line, literally.
There are several ways to establish support and resistance levels. The most reliable of these ways is to simply look at the previous price action patterns in charts and see where prices were repeatedly stopped and prevented from advancing further up or down.
Now, regarding support and resistance lines and their relation to bullish engulfing patterns, you should know that the pattern is most powerful and reliable when it forms near a support level. So, find your lines and check the pattern’s position in relation to them.
3- Apply Technical Indicators to Your Analysis
You can also use other analytic tools, as mentioned before. There are many technical indicators that can help you confirm or deny the bullish engulfing pattern‘s reversal signal. The most widely used indicators with bullish engulfing candles include RSI, MACD, and stochastic oscillators. They can show you whether the market is in an overbought or oversold position.
Simply put, overbought means that the price has dropped too low, and the bears are about to lose control. At the same time, oversold means that the price has grown way more than it should’ve and that the bulls’ nice, sunny days are gonna be ruined by dark, bearish clouds.
You can also consider other candlestick patterns that form after the bullish engulfing candle. For example, hammers and inverted hammers could be a good signal to help you confirm the bullish engulfing pattern.
Aside from these indicators, you can also utilize fundamental analysis to confirm your trend reversal suspicions with factors other than mere price movements.
4- Confirm the Candlestick Pattern With Price Chart Patterns
Another tool to help you confirm bullish engulfing candlestick pattern’s trend reversal signals is price action patterns. They go beyond a couple of candlesticks and assess the market’s price movement from a more generic standpoint. Basically, traders use inductive reasoning to see what happened to asset prices after these patterns formed and apply their findings to future trades. Price chart patterns such as double bottom and bearish wedges can confirm or deny bullish engulfing candlestick patterns and help traders make more informed trading decisions.
5- Manage Your Risk and Open a Position
Since bullish engulfing candle patterns are a signal of potential upward trend reversals, they usually encourage traders to open long positions and close their shorts. If you have short positions open, you can close them after you notice a bullish engulfing pattern. However, if you’re looking to open a long position following bullish engulfing candles, then you need to take some steps. Start by defining your stop-loss and take-profit orders. They enable you to manage your risk and protect your capital by preventing you from losing more than what you can afford and/or keeping your profits intact.
You can set your stop-loss level below the support level under the pattern, where the bullish engulfing candle’s lower shadow has ended. As for the take-profit level, a good place for it can be at the upper resistance line, where the asset is the most liquid.
9 Tips on Trading With Bullish Engulfing Patterns
To truly turn you into a bullish engulfing pattern expert, we’ll go over some expert tips on trading with this reversal candlestick pattern. These tips come from our simple overview above, but they will push the nail into the coffin and ensure you really pay attention to the intricate details. So, without further ado, let’s find 9 tips on trading with bullish engulfing candlestick patterns.
- Invest enough time in learning about bullish and bearish engulfing candlestick patterns.
- Use previous price charts to find examples of bullish engulfing candlestick patterns in the past and how the market reacted to them.
- Master at identifying bullish engulfing patterns.
- Familiarize yourself with other tools and indicators that can help you confirm or deny these patterns.
- Study market volatility and momentum. They impact the way the market reacts to bullish engulfing patterns, and knowing about them helps you make more informed decisions.
- Print out previous charts and practice defining support and resistance lines, as well as stop-loss and take-profit levels after a bullish engulfing pattern forms.
- Open a demo account and practice trading these patterns in real time and with virtual funds. You can take advantage of our demo accounts at ITBFX Broker. They represent all our account types and help you decide what works for you and what doesn’t.
- Based on the trade results of your demo account, adjust your trading strategy for trading with bullish engulfing candlestick patterns.
- Never stop learning. Especially if you practice in the forex or stock market, it’s important to keep up-to-date with newer techniques and strategies that can help you mak
Bullish Engulfing Candlestick Pattern Pros and Cons
Like any other trading tool out there, bullish engulfing candlestick patterns have their special advantages and limitations. This section will briefly review the pros and cons of bullish engulfing reversal patterns.
| PROS | CONS |
|---|---|
| Ease of identification | For trading “quality” bullish engulfing patterns, traders should be decently experienced. |
| Suitable for various timeframes (therefore compatible with several trading strategies such as scalping, swing trading, and position trading) | The frequency with which these patterns form can result in overtly high incentives to open new positions. |
| Frequent formation, which leads to adequate trading opportunities | There could be short stop losses, which necessitates traders to enter winning positions more often to compensate for their losses. |
| Reasonable risk-to-reward ratios |
Final Thoughts
Bullish engulfing candlestick patterns are one of the most frequent and widely traded candlestick patterns in price charts. They usually form at the end of prolonged and significant downtrends, indicating potential upward price reversal.
The anatomy of a bullish engulfing pattern consists of two candles. There is a small bearish candle followed by a larger bullish engulfing candle that opens below the previous candle’s close and closes above its open. It shows the shift of power in the market, as bears start to lose control and bulls are put in charge.
Trading with bullish engulfing candlestick patterns requires taking various factors into consideration and following a well-planned routine, which you learned throughout this article. Additionally, you were introduced to 9 expert tips on trading with bullish engulfing candlestick patterns to help you really set yourself apart from other traders.
If you’re interested in getting started with these candlestick patterns, you can create your ITB account today and get started on trading. If you want more practice, our demo account can help you; and in case you’re more experienced, you can get started with one of our 3 live accounts. To stay on top of your game, you should visit our weblog and social media pages. Not only do they teach all things trading, from basic to advanced, but they also provide helpful insights into market analysis and trading strategies. So don’t wait and check us out now!
Bullish engulfing patterns are two-candle trend reversal patterns that start with a small bearish candle and end with a larger bullish candle that fully engulfs the bearish candle's body, opening below its close and closing above its open.
Bullish engulfing candlestick patterns are usually viewed as signals of potential upward trend reversals. They depict the shift of power in the market. Bulls are the dominant party as the pattern's first down candle forms but lose their power later on as the large bullish candle is established.
You can confirm bullish engulfing candlestick patterns with various tools. Technical indicators, other candlestick patterns, price action patterns, market volatility and momentum, support and resistance levels, and fundamental analysis are some of the tools you can use to confirm or deny this pattern.
Bullish engulfing patterns form at the end of long downtrends, indicating potential upward reversals. They have a small bearish candle, the body of which is engulfed by a large bullish one. Bearish engulfing patterns signal reversals at the end of uptrends. They consist of a small bullish candle that's engulfed by a large bearish one.
Submit Your Comments
(Replying)
Please keep in mind to avoid offensive keywords and also fake information.
Be the first one to comment.