Applying the Bullish Engulfing Candlestick

Over centuries, this charting method has been refined, leading to the discovery of new patterns, including the bullish engulfing pattern. Today, these patterns are globally used by traders and investors, serving as a testament to Homma’s pioneering work in the field of technical analysis. Typically, the higher the volume a candlestick produces, the more significant it is. When combining the two concepts, a bullish engulfing candlestick with high volume represents a higher likelihood of a reversal. This early warning function allows for potentially more gainful entry points into trades bullish engulfing strategy aligned with the new trend direction.

The pattern is reliable because  of its significant reversal in market sentiment, with bulls taking control of the market following a period of bearish control. The bullish engulfing pattern is a trustworthy sign of a possible price reversal. In addition to the bullish engulfing pattern, traders must be aware of other patterns like the bear pennant pattern. This pattern is a continuation pattern that can signal a pause in the prevailing trend, followed by a continuation in the same direction.

1. The pattern comprises two or more candlesticks that trade in the opposite direction of the initial trend.
2. Choosing the right trading journal is essential for traders wanting to analyze performance, refine strategies, and improve consistency.
3. The success rate of the bullish engulfing candlestick pattern is quite promising with a 63% reversal rate according to Bulkowski.
4. The bullish pattern also signals short-term traders to think about closing their trade.

The first candle indicates that the market has been controlled by the bears. Current upward pressure of the market pushes the prices higher, often to the point where the second candle is twice the size of the first. The price was also nicely extended (at the bottom of the BB), so taking a long trade here would be considered a bullish trend-following trade. When the second candle opens, an upward price gap is formed, which serves as a signal of an uptrend continuation. However, by the end of the selected time period, quotes fall below the opening price of the first candle. That is, the body of the second candle engulfs the body of the first candle while trading volumes begin to grow.

Understanding the bear pennant pattern, along with other patterns, can provide a more comprehensive view of market trends. It’s about integrating various tools and insights to create a robust trading strategy. For a detailed explanation of the bear pennant pattern and how to trade it, check out this guide on the bear pennant pattern. The bullish engulfing pattern is known as a reliable signal for a potential reversal from a downtrend to an uptrend. With the right confirmation, this pattern can become a valuable part of your trading arsenal. For example, when prices indicate a trend reversal, the bullish engulfing pattern can be a signal to buy.

For RSI, the strategy sets two levels — overbought level (default 70) and oversold level (default 30). When RSI is above overbought level, it generates an RSI overbought signal. When RSI is below oversold level, it generates an RSI oversold signal.

The formation of this pattern in the chart precedes a trend reversal in the market. The appearance of a pattern on higher timeframes signals a more global trend reversal. Putting all your eggs in the bullish engulfing pattern basket is a mistake. Using it as part of a broader strategy, considering other patterns, and understanding market conditions is key.

What Does a Bullish Engulfing Pattern Tell You?

Keeping the same levels on the chart, we’ve now moved in for a closer look at the setup. The first thing to notice is how the bullish engulfing candle closed above our key level. Notice how the body of the engulfing candle doesn’t cover the previous one.

Not useful in choppy trends

A bullish engulfing pattern that forms and closes above a moving average often signifies a stronger bullish move is coming. A bearish engulfing pattern occurs after a price moves higher and indicates lower prices to come. The second candle is a larger down candle, with a real body that fully engulfs the smaller up candle. In this case, the engulfing candle appeared due to minor fluctuations in the trading volume. For prices to rise steadily in the future, the closing price should be significantly higher than the opening price.

What’s more important is whether the range of the engulfing candle contains the previous one. As the name implies, an engulfing candle is one that completely engulfs the previous candle. Another way of saying it is that the previous candle is completely contained within the engulfing candle’s range (low to high). Yes, most traders accept the definition of an outside bar to be the same as an engulfing bar. A long entry can be above the high of the second candle with a stop loss at the low of the second candle. A short entry can be below the low of the second candle with a stop loss at the high of the second candle.

What are the limitations of the Bullish Engulfing Candlestick Pattern?

1. Engulfing bar patterns are an effective tool in any trader’s arsenal to find entry points.
2. Similarly, if the bullish engulfing pattern occurs near a significant trend line or moving average, it confirms that the market is likely to reverse its trend.
3. This is particularly important when trading bullish engulfing patterns, which can be volatile and subject to sudden price movements.
4. TradingWolf and the persons involved do not take any responsibility for your actions or investments.
5. To successfully trade Forex using engulfing, you can use candlestick analysis with various technical indicators.
6. This pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle.

This is because the pattern signals a potential change in sentiment from bearish to bullish, which can lead to a trend reversal. During broader uptrends, pullbacks that form a bullish engulfing pattern are also more likely to play out. Whereas in broader downtrends or choppy market environments, the bullish engulfing pattern may not be as reliable to trade. A bullish engulfing pattern should preferably be traded when it forms at key levels, or with additional confluences like a RSI divergence.

Sometimes, these patterns can simply be part of a consolidation phase before the trend resumes in the same direction. Traders can use different tools and indicators to confirm the bullish engulfing pattern’s validity, such as volume, moving averages, and trend lines. For example, if the bullish engulfing pattern occurs on high volume, it confirms that buyers have taken control of the market, increasing the pattern’s reliability. Similarly, if the bullish engulfing pattern occurs near a significant trend line or moving average, it confirms that the market is likely to reverse its trend.

There should be a small black candle at the bottom of the downtrend. The black candle must be followed by a white candle whose body shall completely engulf the black candle. The top of the white candle must be higher than the top of the black candle, and its bottom must be lower than the bottom of the black candle.

The most recent candlestick will have red color while the previous candlestick will have a green color. ” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It’s a powerful trading platform that integrates with most major brokers. I helped to design it, which means it has all the trading indicators, news sources, and stock screening capabilities that traders like me look for in a platform. The difference between these two is more than just appearance; it’s about understanding market direction and momentum.

They can be a good starting point for identifying potential market trend shifts. The bullish engulfing patterns have major advantages, however, they are not completely reliable. There are 4 drawbacks of bullish engulfing patterns like false signals, challenging to determine the possible rewards,  backtesting is required, and volume considerations. The price opens lower than the prior low on the second day of the pattern. The buying pressure however, causes it to rise to a level higher than the previous high resulting in a clear victory for the buyers.