Bullish Engulfing Pattern Trading Strategy Guide

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 second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows. Here, the second candle is the bearish candle and engulfs the previous day’s bullish candle.

In this article, you’ve learned what a bullish engulfing pattern means and signifies. We’ve also had a closer look at some examples of how you could implement the bullish engulfing pattern in your own trading. Just remember that you always need to test a strategy before you trade it. You can read more about this in our article on backtesting or how to build a strategy.

The Bullish Engulfing Pattern Scanner is a valuable tool for any trader or investor who is looking to trade at market bottoms.
This way, if the price unexpectedly drops, the position will be automatically closed to limit the loss.
For example, you might want not want to take a trade if the market has been very volatile lately.
This two-candlestick pattern occurs when a small bearish candlestick is followed by a much larger bullish candlestick, which completely engulfs the small bearish candlestick.
The opening of the second candle with the formation of a window up or down and the price closing below or above the previous candle, respectively, is considered an engulfing candle.

Considering ETD has a Beta of 1.24, the stock has a lot of catching up to do. Of course, I’m considering that the company is on track to return to earnings reports that show substantial growth with positive surprise. TELL is currently breaking out of a Falling Wedge after confirming a Double Divergence in the MACD at the 0.886 and also Bullishly Diverging the previous week’s candle. A break of the $1.55 level could quickly take it back to $6.5, as that will likely also align with the RSI entering back into the Bullish Control Zone. More detailed information about the differences between these patterns is presented below. Information available on this website is solely for educational purpose only.

Since we are on a downtrend we want to look for bearish engulfing patterns. Engulfing patterns won’t occur after every pullback, which means potentially missed opportunities. To help avoid this, consider allowing multiple candles to create an engulfing pattern. For example, if after a pullback in an uptrend, it takes two up candles to engulf the prior down candle, consider this a valid signal of a shift in momentum back in the trending direction. Since a bullish engulfing is a reversal pattern, it’s most logical to look for the pattern after the market has gone down for a while.

By avoiding these mistakes and sticking to a solid trading plan, you can increase your chances of success with bullish engulfing trades. When opening a position based on an engulfing pattern, you can implement the strategies detailed below. Psychologically, an engulfing pattern reflects potential changing mood in the market. Our experience is that candlesticks have the most utility on stocks and are much less significant on other asset classes, like for example oil, metals, commodities, and forex.

On-Balance Volume (OBV)

The size of this candle can vary, but it’s typically smaller compared to the following candle in the pattern. Once the MACD gives a bullish signal, traders can enter a long position at the market opening of the next candlestick. The stop-loss should be placed below the low of the engulfing candle pattern. While the engulfing candle is often found at the end of a trend, it can also appear within a strong trend, pointing to continued movement in the same direction.

A bullish engulfing pattern is a candlestick pattern that suggests a potential market reversal from a bearish to a bullish trend.
However, keep in mind that on crypto markets, you do not find open and close trading periods.
In addition, engulfing is one of the key reversal patterns that warn of an imminent trend reversal.
You can use a bullish engulfing pattern to identify trend reversals.
For now, the rally may be stalled as price enters the Ichimoku cloud, a major level of resistance.
The appearance of a pattern in the chart signals an imminent trend reversal.

With their colorful and clear representations of market data, they make it easy to see how the market has moved. When combined together, they create candlestick patterns, and one such pattern is bullish engulfing. Bullish Engulfing candles are important because they can be used as a signal that security is about to change trends.

Mistakes to avoid while trading bullish engulfing

At this point, we’ve covered the fundamentals of the bullish engulfing pattern, from what it is to how it appears. This engulfing pattern is followed by a reversal in the prevailing negative trend, which means buyers seize control of the price and push it higher. Engulfing candles can help you to identify a possible trend reversal, indicate the strength of the move, and also help is identifying exit points.

Profit Targets

In the case of a bullish engulfing pattern, it signifies that the bulls have successfully overtaken the bears. Conversely, a bearish engulfing pattern indicates that the bears, backed by a surge in supply, have taken the reins from the bulls. The key to building confidence when trading the bullish engulfing candle is to complement the candle formation with a supporting signal/indicator.

Benefits of Trading a Bullish Engulfing Pattern

It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed. If this indeed was a price manipulation set by the smart money, then the price should not break above the bullish engulfing candle high. However, since we can’t be 100% in control of what the market does in the eventuality it breaks above the high we want to get out, which is the stop-loss order job to do for us. Price Action Strategy is the ultimate indicator telling you what’s going on in the market. In terms of the market sentiment, it’s the only reliable source because the best technical indicators are all based on price action. Looking at the daily chart below for ETD we can see what looks like an ongoing bear market.

How to Read Candlestick Charts?

Bearish engulfing candles can also be used to confirm other reversal patterns, such as head and shoulders or double top patterns. Bullish engulfing candlesticks are generally seen as a sign that buyers are in full control of the market, following a previous bearish run. The bullish candlestick is often seen as a signal to buy the market, known as going long to take advantage of the market reversal. 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. A downward arrow takes place on top of the bar to indicate the tendency.

As a result, you must utilise other indicators or trend analysis to supplement the trade and define a price goal and exit strategy. In fact, the open of the bullish candle is lower than the open of the bearish candle, and its closure is higher than the close of the bearish candle. Because the bullish candle towers above the bearish candle, the term “engulfing” is used. Begin a position when the price validates the direction of the new, emerging trend. This strategy seeks to confirm a strong momentum shift before committing. Since it is a bearish reversal pattern, you look for it after the market has made an upswing, which is the bullish trend to reverse to the bearish side.

Which of these is most important for your financial advisor to have?

A bullish engulfing pattern occurs after a downtrend in the area of low prices. On higher timeframes from H4, the pattern gives a stronger signal for trend reversal. On a candlestick chart, this pattern consists of a smaller bearish candle followed by a larger bullish candle that completely ‘engulfs’ bullish engulfing strategy the former. It represents a key shift in market dynamics, signalling that purchasing pressure has surpassed selling pressure. It’s important to recognize that after a robust or mature downtrend, the appearance of a bullish engulfing pattern might still face residual selling pressure in the short term.

As a result, the initial upward move may not be trustworthy, causing the market to retest the lows of the bullish engulfing pattern. This is why some traders prefer to wait for the market to revisit the lows of the engulfing pattern before opening a long position. The size of the candles within the bullish engulfing pattern plays a pivotal role in the strength of the signal. The second candle, the bullish one, should be significantly larger than the first bearish candle, thereby ‚engulfing‘ it. The color and formation of the candlestick can provide traders with valuable information about market sentiment. A bullish candle, for instance, suggests buying pressure, while a bearish candle indicates selling pressure.

Understanding the difference between bullish patterns and bearish patterns will be key to leveraging engulfing patterns to your advantage. We take entry on the Bullish engulfing candlestick for better entry. Try to enter within 20 seconds before the Bullish engulfing candlestick closes. Stop loss should be below a few points of the low of that bullish engulfing candlestick.