Bullish Engulfing Pattern: Definition, Examples, and How to Trade it
So, what is a Bullish Engulfing Pattern?
A bullish engulfing pattern is a candlestick chart pattern that occurs when a small red candlestick (indicates a stock closed lower than its open) is followed by a large green candlestick (indicates a stock closed higher than its open).
This pattern indicates that the bears are losing control of the market and that the bulls are taking over. The bullish engulfing pattern can be used as a buy signal, telling traders when to buy a stock or other asset.
The bullish engulfing pattern is created when the open and close of the red candlestick are both tighter than the open and close of the green candlestick. The green candlestick should also be significantly larger than the red candlestick, indicating that there is strong buying pressure in the market.
Said another way, it is a two-candle reversal pattern whereby the body of the second candle completely engulfs the body of the first candle, not including the tail.
The bullish engulfing pattern is a reversal pattern, which means it can be used to signal that a declining stock or other asset is about to move higher. This makes the bullish engulfing pattern an important tool for traders to use when making decisions about when to buy or sell a stock.
For starters, the bullish engulfing pattern can be found on any time frame but is most commonly used on daily or weekly charts. To qualify as a true bullish engulfing pattern, the second candlestick should close above the midpoint of the first candlestick's body.
Also, be aware that a bullish engulfing pattern can occur in both an uptrend and a downtrend. In a downtrend, a bullish engulfing pattern can signal a reversal. Whereas, in an uptrend, it can signal the continuation of an uptrend.
Bullish vs. Bearish Engulfing Pattern
A bearish engulfing pattern is the exact same thing as the bullish engulfing pattern, only in reverse. So, for all the short players out there, be sure to keep an eye out for bearish engulfing patterns to appear when we are in a bear market.
How to trade the Bullish Engulfing pattern
When trading the bullish engulfing pattern, it is important to look for other bullish signals to confirm that the market is indeed about to move higher.
These bullish signals could include a rising trend line, key support levels, and/or moving averages.
Traders and investors should not only look at the candles in question which form the bullish engulfing pattern but should also look at the preceding candles.
A bullish engulfing pattern is more reliable when it occurs after a period of bearishness, as this indicates a potential shift in the market trend.
For example, they have a higher probability of signaling a reversal, when they are preceded by four or more red candles.
If you spot a bullish engulfing pattern, one way to trade it is by buying when the second candlestick closes above the midpoint of the first candlestick's body. Your stop loss can be placed below the low of the pattern.
Here are a couple of ways to approach this trade:
One method is to wait for the candlestick pattern to form and then enter a long position when the next candle opens.
Another method is to place a buy-stop order just above the high of the second candle.
We put together an easy infographic cheat sheet of the top candlestick patterns to help train your eye.
Bullish Engulfing Pattern Examples
Now, let’s take a look at some examples of bullish engulfing patterns on the growth stocks below to make sure the concept is crystal clear.
In the examples below, our chart colors are different than those above. We colored the Up days Blue instead of green, and Down days Pink instead of red.
Bullish Engulfing Pattern Reliability
The bullish engulfing pattern is a relatively reliable reversal pattern, especially when it occurs after a prolonged downtrend.
The key to its reliability is the fact that it entails a strong reversal in market sentiment, with bulls taking control of the market after a period of bearishness. This shift in market sentiment is usually enough to propel prices higher. Of course, no pattern is 100% reliable, and there are always exceptions. In general, though, the bullish engulfing pattern is a reliable indicator of a potential reversal in price.
Bullish engulfing signals should also be considered in the context of overall market conditions. For example, a bullish engulfing signal in an up-trending market may not be as significant as one in a down-trending market. Likewise, bullish engulfing signals that occur near major support levels are likely to be more significant than those that occur in the middle of a trading range.