How to Trade Bullish Engulfing Patterns

Bullish engulfing patterns are two candlestick patterns found on stock charts. The bullish engulfing pattern is considered to be a reversal pattern at the end of downtrends or near support levels. They consist of a big bullish candlestick that engulfs a smaller bearish one. Watch for price to break above bullish candlestick and hold to confirm bullish continuation.

What Is a Bullish Engulfing Pattern?

A bullish engulfing pattern consists of two candlesticks that form near support levels where the 2nd bullish candle engulfs the smaller 1st bearish candle. Typically, when the 2nd smaller candle engulfs the first, price holds support and causes a bullish reversal.

Bullish engulfing patterns are formed when a small bearish candlestick is followed by a large bullish candlestick that completely engulfs the previous day’s candle. Hence where the name of the pattern comes from.

The wicks of the bearish candle are usually short so that the bullish candlestick can cover the first candle. There wasn’t a lot of price movement that day.

As the name of the pattern implies, the bulls have taken control from the bears. This type of pattern usually occurs in a downtrend. The bulls decide not to let price fall any further.

The second candle shows a ton of buying interest. It takes over the highs and lows of the previous day. It’s like a feeding frenzy, driving price up so that it closes at or near the high of day.

This is a trigger to buyers who didn’t get in on it at first. They come in to drive price even higher. If the candle that forms after the bullish engulfing pattern forms, that’s confirmation that an uptrend is now forming.

Technicals

Where bullish engulfing patterns form in regards to the trend it’s in is one of the most important factors for the reversal. When this pattern forms at the end of a downtrend, the reversal is much more powerful.

It’s seen as more powerful because it represents the bottom or a key support level. The lows of the candle should be the low of the downtrend. Typically the candles preceding a bullish engulfing pattern should be forming lower lows.

When the next candle that forms after the bullish engulfing candle closes above, it’s a pretty significant signal that the official trend reversal is happening. It now needs higher highs.

As always it’s important to remember that patterns break down all the time. You need to look at other indicators to make sure the trend reversal is in place and solid and not just the bears trying to trap the bulls.

Confirmation Is Key

Confirmation of any pattern is pretty important. A reversal pattern like the bullish engulfing pattern needs confirmation of a reversal. The pattern itself isn’t confirmation enough. What other indicators, trend lines, or other criteria do you need to enter the trade? Having a system in place to make you feel confident on entering the trade is very critical.

Moving average lines are usually a pretty important aspect of trading for people. They give confirmation of the trend and can be used for buy and sell signals as well as acting as support and resistance.

Pairing those with indecision candles such as doji candlesticks can help you anticipate a move. Were there a few doji’s before the bullish engulfing pattern formed? Were those candles at some level of support that held in the past?

Using RSI and MACD along with moving average lines are a great resource for traders who want to keep it simple.

Typically, bullish engulfing patterns tend to happen in downtrends, be they short, medium or long down trends. Is the RSI oversold? Does it need to correct? Did it hit a Fibonacci level? How far from moving average lines are the candlesticks? Getting your ducks lined up before you enter is going to help. Once you get a set of criteria in place…it’s time to put on the trade!

These are all important things to consider when you’re thinking of placing a trade. They’re technicals other traders use as well as pay attention to.