One of the most straightforward candlestick patterns in both forex and stock trading is the Bullish Engulfing Candle Stick Pattern. This is a prized pattern for traders not only because it is a sign of reversal toward a bullish market but it is also easy to spot in a chart. In this article, we’ll provide you with all you need to know about the Bullish Engulfing pattern and how you can use it to win trades on actual trading platforms like eToro.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is the Bullish Engulfing Candlestick Pattern?
A Bullish Engulfing Candlestick Pattern is a candlestick formation that signals a reversal – from a bearish trend toward a bullish trend. it is usually found at the bottom of a bearish trend or downtrend but can also be found on trenches of a downtrend market.
This pattern is easy to spot in a chart because it appears when prices go down and are only made up of two candles – a bearish first candle and a bullish second candle. To be considered as a Bullish Engulfing candlestick pattern, the bearish first candle should have a low that is lower than the previous candle and the bullish second candle should have a body that engulfs the bearish candle – thus the name bullish engulfing. The bullish candle should have a body and tail that totally overcomes the bearish candle. The thicker body of the bullish candle signifies the overpowering strength of the buyers which enables the trend to go at a reversal.
In the image below, the right side of the chart shows a downtrend through the series of bearish candles. Each bearish candle has lower highs and lows with a varying tail or shadow sizes. At the bottom of the trend, a bullish candle that engulfs the previous bullish candle develops which completes the formation of the Bullish Engulfing pattern. Notice that the body of the bullish candle is much bigger than the bearish candle prior to it. It has a bigger body that engulfs the bearish candle with its tail combined.
After the formation of the pattern, the trend reverses to a bullish trend creating higher highs and higher lows.
How to implement the Bullish Engulfing Pattern on an actual trade
As mentioned earlier, the Bullish Engulfing candlestick pattern is found at the end of a bearish trend but can also found below trenches – as shown in the image below.
Below is an example of a Bullish Engulfing pattern formation on the asset – Apple. We can notice from this example that the pattern formed within trenches or somewhere within an uptrend. As the price went down momentarily, the bounce back happened after the formation of the pattern. The best entry points in this example would be at the closing of the bullish candle or at the highest end of the bearish candle from the pattern.
Here’s another example of a Bullish Engulfing pattern formation for the asset – HD (Home Depot Inc). In this example, the pattern formed at the end of a downtrend. Just like the previous example, notice the more prominent body of the bullish candle which engulfs or overpowers the bearish candle. This signals strength among buyers and trend reversal towards a bullish trend.
The Bullish Engulfing pattern is quite easy to find in any trend except for a trend that is on consolidation. A trend in consolidation is usually composed of a non-volatile price action where there is not much price movement.
From the examples provided, the best entry points would be established by referring to the previous open of the bearish candle. By referring to the examples, we can notice that the price after the pattern reached the opening of the bearish candle. It reached the opening price using its body or its tail. So for safe entry points, it is best to consider the bearish candle’s opening price.
The Bullish Engulfing Pattern is among the most basic candlestick patterns that are easy to spot and interpret in a chart. It is a powerful signal of a possible bullish trend thus providing potential gains for a trader. potential risks of wrong entries can be averted by considering the price movement of the bearish candle in the pattern – as mentioned earlier, the best entry point would be the opening price of the bearish candle.
Only by understanding the candlestick pattern can one trader be effective in using such a pattern. With diligent research about a given stock along with constant practice in using the Bullish Engulfing pattern, a trader has better chances of making smart and profitable decisions in trading.
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