Table of Contents
- What Is a Bullish Engulfing Pattern?
- Key Takeaways
- Understanding a Bullish Engulfing Pattern
- Important Advice on Entry
- What Does a Bullish Engulfing Pattern Tell You?
- Bullish Engulfing Pattern vs. Bearish Engulfing Pattern
- Example of a Bullish Engulfing Pattern
- Bullish Engulfing Candle Reversals
- Acting on a Bullish Engulfing Pattern
- Limitations of Using Engulfing Patterns
What Is a Bullish Engulfing Pattern?
Let me explain the bullish engulfing pattern directly: it's a two-candle reversal setup where the second candle completely overrides the first. You see it when a small black candlestick, indicating a bearish trend, is followed the next day by a large white candlestick showing a bullish trend, with its body fully overlapping or engulfing the previous day's candlestick body. Contrast this with the bearish engulfing pattern, which works in the opposite way.
Key Takeaways
Here's what you need to know about the bullish engulfing pattern. It completely overlaps or engulfs the body of the previous day's candlestick. These patterns are more likely to signal reversals if they're preceded by four or more black candlesticks. You should examine not just the two candlesticks forming the pattern but also the ones before them. When combined with the current trend, a bullish engulfing pattern can be a powerful signal, but remember, it's not bulletproof.
Understanding a Bullish Engulfing Pattern
The bullish engulfing pattern is a two-candle reversal pattern, and I'll break it down for you. The second candle completely engulfs the real body of the first one, ignoring the length of the tail shadows. This appears in a downtrend as one dark candle followed by a larger hollow candle. On that second day, the price opens lower than the previous low, but buying pressure drives it up past the previous high, clearly showing buyers have taken control.
Important Advice on Entry
I advise you to enter a long position when the price moves higher than the high of the second engulfing candle—that confirms the downtrend reversal.
What Does a Bullish Engulfing Pattern Tell You?
Don't mistake a bullish engulfing pattern for just any white candlestick following a black one. For it to form properly, the stock must open lower on Day 2 than it closed on Day 1; otherwise, the white body can't engulf the black one. This setup shows bears controlling the morning, only for bulls to dominate by day's end. The white candlestick often has a small or no upper wick, meaning it closed near its high, hinting at continued upward surge. Analysts watch these closely because they often signal trend reversals, though the next day could still gap up and form a black candle.
Bullish Engulfing Pattern vs. Bearish Engulfing Pattern
These two patterns are direct opposites, so let's compare them. A bearish engulfing pattern happens after a price rise and points to lower prices ahead. It starts with an up candle, followed by a larger down candle whose body fully engulfs the smaller up candle.
Example of a Bullish Engulfing Pattern
Take Philip Morris (PM) stock as a historical example. In 2011, shares were in a strong uptrend, but by 2012, they were pulling back. On January 13, 2012, a bullish engulfing pattern appeared: the price opened at $76.22 and closed at $77.32, overshadowing the prior day's slight down move. This indicated bulls were still active, potentially starting another uptrend wave.
Bullish Engulfing Candle Reversals
You need to consider the broader context for bullish engulfing patterns. Look at the preceding candlesticks to see if it truly marks a reversal. These patterns are stronger when followed by four or more black candlesticks—the more it engulfs, the better the chance of a reversal, especially if confirmed by another white candle closing higher.
Acting on a Bullish Engulfing Pattern
Traders like you want to know if this pattern signals a sentiment shift and a buying opportunity. If volume rises with price, aggressive traders might buy near the end of the engulfing candle day, expecting more upside. Conservative ones wait for the next day to confirm the reversal, trading some potential gains for certainty.
Limitations of Using Engulfing Patterns
A bullish engulfing pattern can be strong, particularly after a clear downtrend, as it shows momentum shifting up. But in choppy price action, even if overall rising, its significance drops because it's common. The second candle might be oversized, leading to large stop losses that don't justify the risk. Candlesticks don't give price targets, so you'll need indicators or trend analysis to set exits or targets in profitable trades.
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