What Is a Bullish Engulfing Pattern?
A Bullish Engulfing Pattern is formed by 2 candlesticks. The first candle is a short red body that is completely engulfed by the second larger green candle. The Bullish Engulfing pattern appears in a downtrend and can be identified when a small red candlestick showing a bearish trend, is followed the next day by a large green candlestick, showing a bullish trend, the body of which completely engulfs the body of the previous day’s candlestick.
Example of a Bullish Engulfing Pattern
What Does the Bullish Engulfing Pattern Signal?
The Bullish Engulfing Pattern signals bullish momentum is about to overtake the short sellers in the market. It is seen at the end of some downward price movements, illustrated by a short red body completely engulfed by the second larger green candle. This signals that bulls have overtaken the bears in the market and that a great bullish rally with momentum is beginning to take place. A bullish engulfing pattern means that bears controlled the price of the asset all the while during the 1st candle only to have bulls decisively take over by the close of the next second candle.
The pattern has greater confirmation when the open price of the engulfing candle is well below the close of the first candle, and when the close of the engulfing candle is well above the open of the first candle. Before hopping on the trade right away, traders typically wait for the second engulfing candle to close and then take action on the next following candles.
Trading a Bullish Engulfing Pattern
When looking at a candlestick chart, you may notice a small bearish movement in price. This is then followed by a Bullish Engulfing Pattern, where the small red candlestick is overshadowed by the large green candlestick. The pattern indicates buying interest in the markets, and if you were to enter a trade at the open of the candle you will end up making decent profits.
Looking at Bitcoin on the 4-hour time frame we can see a sell off that was originally halted by a hammer candle before really finding its reversal on the bullish engulfing candle. From this candle on, this sparked the reversal in the market going from a bear to a bull market.
Looking at the chart of Ford on the daily time frame, this bullish engulfing pattern occurred at a pivotal point in the market. Instead of the move that was originally created at $4.30 stopping at $7.84 and reversing back down to that $4.30 or even to touch the topside of this uptrend, the price held up and reversed with a bullish engulfing pattern.
Similarities Between the Bullish Engulfing and Bearish Engulfing Pattern
The Bullish Engulfing Pattern and Bearish Engulfing Pattern are two complete opposites, but what they have in common is the fact that they are both reversal patterns found at either the top or bottom of a move in the markets. They are the exact same pattern, just inverse of each other. Bullish occurs at the bottom of the market indicating a bullish reversal, while the bearish engulfing occurs at the top of the market indicating a bearish reversal.
Differences Between the Bullish Engulfing and Bearish Engulfing Pattern
Limitations of Bullish Engulfing Patterns
It is important to know that this chart pattern helps to identify a potential reversal which suggests that the market has found its bottom and the bullish engulfing candle pattern is just a result clearly indicating a reversal. It is just as important to know that a bullish engulfing pattern consists of just 2 candlesticks, and that’s it. It is very difficult to identify a true reversal just based off of these 2 candles, you need to use other means of technical analysis and zoom out on your candlestick chart to get a full picture of this pattern.