Trading Education Guides Candlesticks
- By Angelica Rieder
- Updated April 4, 2024
8 min read
- Reviewed by Bullish Bears
- Fact checked by Lucien Bechard
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Bullish engulfing patterns are two candlestick patterns found on stock charts. The bullish engulfing pattern is considered a reversal at the end of downtrends or near support levels. They consist of a big bullish candlestick that engulfs a smaller bearish one. Watch for the price to break above the bullish candlestick and hold to confirm bullish continuation.
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Table of Contents
- Bullish Engulfing Pattern Meaning
- Basics
- Confirmation Is Key
- Bullish Engulfing Pattern Trading Strategy
- Bullish Engulfing Pattern Example
- Fakeout Example
- Screeners
- Final Thoughts: Bullish Engulfing Patterns
- Frequently Asked Questions
Bullish Engulfing Pattern Meaning
A bullish engulfing pattern consists of two candlesticks that form near support levels; the 2nd bullish candle engulfs the smaller 1st bearish candle. Typically, when the 2nd smaller candle engulfs the first, the 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, which often signals that there was not a lot of price movement that day.
As the pattern’s name implies, the bulls have taken control of the bears. This type of pattern usually occurs in a downtrend. The bulls decide not to let the 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 the price up so that it closes at or near the high of the day.
This triggers buyers who did not get in on it at first. They come in to drive prices even higher. If the candle that forms after the BE pattern forms, that is confirmation that an uptrend is forming.
This is an example of a bullish engulfing pattern. It’s a two-candlestick bullish reversal. Traders enter a long position once the price breaks above the bullish candlestick and use a candle close below the bullish candlestick as a stop level.
Basics
Where a bullish engulfing pattern forms in regards to the pattern is one of the most important factors for the reversal. The reversal is more powerful when this pattern forms at the end of a downtrend.
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 form 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.
Remember that patterns always break down; traders need to look at other indicators to ensure the trend reversal is in place and solid, not just the bears trying to trap the bulls.
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Confirmation Is Key
Confirmation of any pattern is important. A reversal pattern like the bullish engulfing pattern needs confirmation of a reversal. The pattern itself needs to be confirmed more. When trading, try to have as many other technical indicators, trend lines, or other criteria pointing in the same direction as your trade idea. A system in place helps create confidence in entering the trade; this is critical.
Moving average lines is a pretty important aspect of trading for people. They confirm the trend, can be used for buy and sell signals, and act 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 is a great resource for traders who want to keep it simple.
Typically, BE patterns happen in downtrends, be they short, medium, or long downtrends. It is important to check RSI to see whether it is oversold or needs correcting. Fibonacci levels are also important to check; 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 we get the 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 helpful for any new or seasoned trader.
Bullish Engulfing Pattern Trading Strategy
- 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 the price breaks above the 2nd candlestick
- Place stop below the base of the 2nd candle
- Some traders take a short position once the price breaks below 2nd candle
- Then place the stop above the 2nd candle
Bullish Engulfing Pattern Example
This is an example of a bullish engulfing pattern on a daily chart of $CAT. The pattern formed at the base of a falling wedge pattern. Traders would enter a long position as the price breaks above the bullish candlestick and use a candle close below as a stop. Once the price broke out of the falling wedge, it became a rising wedge pattern. You’ll also notice that there was an inverse head and shoulders at the center of the pattern.
This bullish engulfing pattern was particularly strong because it was clearly defined at the base of a downtrend, and the candlesticks were small, which enabled good risk management.
TrendSpider chart using the candlestick recognition feature to spot patterns we select to filter out! The chart above shows several different engulfing patterns that are both bullish and bearish. You’ll notice that these reversals take place near uptrends and downtrends. Sometimes, there will be fakeouts with bullish engulfing patterns, and they will reverse to the downside depending on where the pattern formation takes place.
Fakeout Example
The picture above is a daily chart of $GOOGLE. There are three candlesticks that are highlighted. The first two make up a bullish engulfing pattern, however it happed at the top of a large bullish candlestick. There was a quick fakeout of an engulfing pattern that was bearish, which would have faked out the bulls.
This is why it’s important to be aware of fakeouts because right after the bulls got trapped the bears got trapped by the bullish harami formation. This bullish formation turned into a large rising wedge pattern, which turned into a bearish megaphone pattern.
Screeners
Screeners or scanners can play an important part in helping find different types of setups. However, thanks to their screener, it saves so much time. TrendSpider is a pioneer with their pattern screener. This is a great way to find bullish engulfing setups and any other patterns the trader might search for.
Bullish engulfing pattern screener settings for Trendspider. Before jumping into a scanner, learning the basics of bullish engulfing patterns is important. The chart above could look a bit intimidating for new traders. TrendSpider is an awesome tool when you are comfortable as a trader. This tool is also helpful for learning patterns. You can filter out the patterns and see how they form in the real world of trading.
Final Thoughts: Bullish Engulfing Patterns
Bullish engulfing patterns are a really popular reversal pattern, especially if they occur at the bottom of a strong downtrend. Many times, a bullish engulfing might have a short-term rally but ultimately fail. It’s important to remember that fakeouts do happen,and that’s why it’s important to look at the overall patterns and trend.
Frequently Asked Questions
How Reliable Is Bullish Engulfing?
The bullish engulfing pattern is reliable, with an overall win rate of 55%. However, it's not as reliable as some of the other reversal patterns.
What Is the Psychology Behind Bullish Engulfing Pattern?
The psychology behind the bullish engulfing pattern is that the buyers come in at key support levels and push the price up. The volume increasing buying pressure and creates the large bullish candle.
What Time Frame Is a Bullish Engulfing Candle?
A bullish engulfing candle pattern can happen on any time frame. They are a reliable reversal pattern that shows the bulls are taking over control of the bears.
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