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.
Table of Contents
What Is a Bullish Engulfing Pattern?
A bullish engulfing pattern consists of two candlesticks that form near support levels; in which 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 candle. This is how the pattern got its name.
The wicks of the bearish candle are usually short so that the bullish candlestick can cover the first candle; often signals that there was not 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; driving price up so that it closes at or near the high of day.
This is a trigger to buyers who did not 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 is confirmation that an uptrend is now forming.
Technicals
Where a bullish engulfing pattern forms in regards to the pattern is one of the most important factors for the reversal. When this pattern forms at the end of a downtrend, the reversal is more powerful.
It is 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, that is a significant signal that the official trend reversal is happening. It now needs higher highs.
As always remember that patterns break down all the time; traders 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 is not confirmation enough. When trading try and have as many other technical indicators, trend lines, or other criteria pointing in the same direction as your trade idea. Having a system in place helps create confidence on entering the trade; this 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 anticipate a move.
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. Important to check RSI to see whether it is oversold or if it needs to correct. Fibonacci levels are important to check as well; these can be areas of interest when trading; whether swing or say trading. How far from moving average lines are the candlesticks? Getting a game plan in place before entering is going to help. Once get a criteria in place…it is time to execute the trade!
These are all important things to consider when thinking of placing a trade. Technical analysis can be a very helpful tool to any trader; whether new trader or seasoned veteran.
TrendSpider chart using the candlestick recognition feature to spot patterns that we select to be filtered out!
How to Trade Bullish Engulfing Patterns
- Watch for 1st bearish candlestick to form
- Next, watch for 2nd larger candlestick to engulf 1st smaller bearish candle
- Then, watch for 3rd candlestick to break above 2nd
- Traders take a long position once price breaks above the 2nd candlestick
- Place stop below the base of the 2nd candle
- Some traders take a short position once price breaks below 2nd candle
- Then place stop above the 2nd candle
Screeners
Screeners or scanners can play an important part in helping find different types of set ups. However; now thanks to their screener it saves so much time. TrendSpider is a pioneer with their pattern screener. This a great way to find bullish engulfing setups, and any other patterns the trader might be searching for.
Bullish engulfing pattern screener settings for Trendspider.
