Bullish Engulfing Candlestick Pattern: What Is and How to Trade | LiteFinance (2024)

The Bullish Engulfing pattern is a candlestick pattern that can signal a reversal of a bearish trend in the market. In this guide, we'll break down the pattern and show you how to spot it in the market, provide real examples, and offer tips for trading effectively.

What is a Bullish Engulfing Candle Pattern?

A Bullish Engulfing Candle Pattern is a two candlestick pattern used in technical analysis that can indicate a trend reversal. It's made up of two candlesticks, where the second candle completely engulfs the first one, and the second candle is bullish.

The bullish engulfing pattern appears at the end of a downtrend and can signal that the closing price has reached a strong support level, and buying pressure is increasing.

Remember, while the Bullish Engulfing Candle Pattern can be a helpful tool for identifying potential bullish trends and trading opportunities, it's important to consider other factors, seek independent advice, and manage risk appropriately.

How to Find Engulfing Candlestick Patterns?

A bullish engulfing pattern occurs when a small bearish candlestick is followed by a larger bullish candlestick, and the bullish candlestick completely engulfs the bearish one. Here's how you can spot this pattern:

First, determine the direction of the trend. You're looking for a pronounced downtrend. This sets the stage for a bullish reversal, which is what the engulfing pattern indicates. However, keep in mind that the price could also be consolidating, forming a base for an upward trend.

Next, look at the two candlesticks since it’s a two candlestick pattern. The first candle should be small and bearish candlestick, while the second candle should be larger and bullish. The body of the bullish candlestick should completely cover the body of the bearish one, but the size of the shadows doesn't matter.

If the first candle is really small or non-existent, it could be a Doji candlestick pattern. This also signals a possible bullish reversal.

Bullish Engulfing Candlestick Pattern in Trading

To understand the Bullish Engulfing patterns, traders need to first identify support and resistance levels, which are key levels that the price tends to bounce off. When the price hits a support level, it tends to bounce back up, and when it hits a resistance level, it tends to bounce back down. Other factors to pay attention to while trying to spot this pattern are listed below:

1. Trading volumes and market orders, which show the number of trades happening at a certain price level. The more trades happen, the more important that price level is to the market.

2. The Engulfing be it a bearish or bullish pattern consists of two candlesticks. The first candle is small, and the second candle is large and bullish. This suggests that the bears are losing control, and the bulls are taking over.

3. This pattern is most effective when it forms after a long downtrend, where the price has been falling for a while.

4. Market consensus and bullish sentiment. If the majority of traders are bullish, it's more likely that the price will continue to rise.

Confirmation of Engulfing Pattern

To confirm bullish engulfing patterns, it's helpful to use technical analysis indicators such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), or Stochastic Oscillator. These indicators can help identify areas where the trend may potentially reverse into a downward or upward trend. For example, if the RSI indicates a bullish divergence and the MACD breaks the zero-level upside, it could signal a shift toward a bullish trend.

In addition, larger price patterns can also serve as confirmation of the engulfing pattern. Examples of such patterns include double bottoms, falling wedges, and ascending triangles.

Let's take a closer look at an example. On the four-hour EURUSD chart, we can see that the price has been in a downtrend. However, at the trend low, there are several bullish reversal signals. These include a falling wedge pattern that breaks out upside, the RSI rebounding from the lower border, and a series of reversal patterns such as a hammer, an inverted hammer, and a bullish engulfing pattern. The combination of these signals means the price has reached the local low, and one could enter a long trade.

Reduce Your Risk with Stop Loss

One useful tool for managing risk is the stop-loss order. A stop-loss order is an instruction to your broker to automatically sell your position if the price reaches a certain level. This can help you limit your losses if the market moves against you.

To use a stop-loss order effectively, you need to first identify the support and resistance levels of the market. These are points on the chart where the price has historically tended to either stop falling (support) or stop rising (resistance). Once you've identified these levels, you can then place your stop-loss order below the support level if you're going long, or above the resistance level if you're going short.

Support and Resistance levels

Support and resistance levels are important in trading because they help you identify entry and exit points for profitable trades. Put, support is a level where the price tends to stop falling, while resistance is a level where the price tends to stop rising.

When you see two candles of a bullish engulfing pattern at a support level, it's a sign that the price is likely to reverse and go up. This is a good time to enter a buy trade and set your stop loss just below the support level. On the other hand, if you see bearish engulfing patterns at a resistance level, it's a sign that the price is likely to reverse and go down. This is a good time to exit a buy trade and take your profit.

To find these support and resistance levels, you can look at previous price action on a chart. Look for areas where the price has bounced off a level multiple times, either up or down. These are likely to be support or resistance levels. For example, if you see that the price has bounced off a certain level three times before, it's likely that this level will act as support or resistance in the future.

Engulfing Pattern Examples

Take a look at this USDCHF chart. There is a bullish engulfing pattern. It happened at a support level, which makes it even more significant. If we break down the pattern, we can see that it starts with a doji candlestick, which means there's uncertainty in the market. Then, a bullish inverted hammer candlestick appears, suggesting a possible reversal. Finally, we see the big green candle that engulfs the previous red candle. Altogether, it's a strong signal that the price might start going up.

After the bullish engulfing pattern appears, we see a three-week rally in price. This is a good opportunity to enter a buy trade, with a stop loss set below the support level.

Let's look at another example in the daily ETHUSD chart. You can see the price was consolidating for a while, but then a big green candlestick appeared, engulfing the previous red candle. This was a sign of a potential bullish reversal. We also see an inverted hammer candlestick, which is a reversal pattern that confirms the bullish engulfing pattern. Together, these patterns indicate that the price is likely to start going up. Following these patterns, we see a long-term uptrend.

Now let's talk about the daily stock chart of Netflix, Inc. You can see that after a downtrend, the price starts turning up near a support level. There are a series of bullish engulfing patterns. This is a strong signal that the price is likely to start going up. We also see hammer and inverted hammer that confirm the reversal.

After the bullish engulfing patterns, we see a three-white soldiers pattern, which is a trend continuation pattern. This means the price is likely to keep going up.

How to trade the Bullish Engulfing pattern

Let us look at a step-by-step plan to trade a bullish engulfing pattern. I will use the hourly EURCAD price chart as an example of short-term trading.

1. Define the pattern and support/resistance levels

To trade the Bullish Engulfing pattern, it's important to identify the support and resistance levels. It can be done by looking at previous price action and determining where buying and selling pressure has been strong.

In the chart below, you can see a bullish engulfing pattern forming after a downtrend. The blue line represents the support level and the red line represents the resistance level. By identifying these levels, traders can make more informed trading decisions and better manage their risk.

2. Add technical indicators analysis

Technical indicators are tools that help traders determine whether the market is oversold or overbought. Oversold means the stock price has dropped too low, while overbought means it's gone up too much. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are two popular indicators to confirm the bullish engulfing pattern.

In the chart, the RSI indicator shows that the values have gone into the oversold zone. The MACD indicator crosses above the zero line, which is also a reversal signal.

3. Confirm the pattern using other candlestick patterns

To increase the chances of a successful trade, confirm the bullish engulfing using other candlestick patterns, such as a hammer or an inverted hammer.

4. Enter a trade, define the target profit and a set stop-loss

When you're confident that the bullish engulfing pattern is a signal to buy, enter the trade with a stop-loss and target profit. A stop loss should be set beyond the support level, below the shadow of the engulfing candle. The target is set around the upper resistance, as the highest liquidity for the instrument is there.

5. Take Profit

When the stock price reaches your target profit, it's time to take your profit and exit the trade. You can do this either fully or partially, depending on your trading strategy. As you see, the target is reached in seven days, and the profit is 2614 pips.

Bullish and Bearish Engulfing Pattern Difference

Bullish and bearish engulfing patterns are signals that indicate a possible trend reversal in the stock market. When a bearish engulfing pattern occurs at a high, it signals the end of an uptrend, while a bullish engulfing pattern that forms at a low warns of an upward reversal.

Conclusion

The bullish engulfing pattern signals a potential trend reversal from a downtrend to an uptrend. To trade this pattern successfully, it's essential to confirm it with other indicators and candlestick patterns. You can practice trading the bullish engulfing pattern for free on LiteFinance's user-friendly trading terminal.

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.