What is the Bullish Engulfing Pattern?

A bullish engulfing pattern occurs when a small candlestick is followed by a large candlestick whose body completely overlaps or engulfs the body of the previous day’s candlestick. This pattern indicates that bears are losing control of the market and bulls are taking over. 

Read on to learn more about bullish engulfing pattern, bullish engulfing candle, and more in detail.

Understanding the Bullish Engulfing Pattern

A bullish engulfing pattern signals to buyers that an upward trend may be imminent following a downward trend. This offers an ideal opportunity for buyers to enter a long position, as it indicates a potential increase in price due to the reversal indicated by the pattern.

The engulfing candle is a popular candlestick pattern used to assess whether the market is under upward or downward pressure. As a lagging technical indicator, engulfing candles appear after the price activity and require data from the two preceding candlesticks before signaling a potential market movement.

Table of Contents

1. Understanding the Bullish Engulfing Pattern
2. Bearish Engulfing Pattern vs Bullish Engulfing Pattern
3. How to identify a bullish engulfing pattern?
4. Example of the Bullish Engulfing Pattern
5. How to trade the Bullish Engulfing Pattern?
6. Importance of color of the Bullish Engulfing Candlestick Pattern 
7. How should you approach a bullish engulfing pattern trade?
8. What are the benefits of the Bullish Engulfing Candlestick Pattern?
9. Limitation of using Bullish Engulfing Pattern

Bearish Engulfing Pattern vs Bullish Engulfing Pattern

How to identify a bullish engulfing pattern?

You can identify a bullish engulfing pattern by keeping the below points in mind:

• The first candle should be bearish, and the second candle should be bullish.
• The second candle's opening price must be lower than the first candle's closing price.
• The second candle's closing price must be higher than the first candle's opening price.
• The high and low of the second candle should entirely cover the range of the first candle.

When these above conditions are met, it indicates that the bulls have gained control of the market and suggests that a bullish trend reversal may be imminent. This pattern is often used by traders as a signal to buy, as it indicates that prices may be on the rise.

To identify a bullish engulfing pattern, it's crucial to pay attention to the candle colors. A green candle shows an upward price movement, while a red candle signifies a downward movement. In a downtrend, a large green candle that engulfs a smaller red candle forms the pattern, signaling a shift in control from sellers to buyers and suggesting a potential reversal in the trend.

Example of the Bullish Engulfing Pattern

When it appears at the bottom of a downtrend, the bullish engulfing candle signifies a reversal of the downtrend and indicates an increase in buying pressure. This pattern shows that more buyers are entering the market and driving prices higher, breaking the current trend. The pattern consists of two candles, with the second green candle completely engulfing the body of the first red candle.

How to trade the Bullish Engulfing Pattern?

If you are looking to trade based on a bullish engulfing pattern, you should seek additional bullish signals to confirm that the market is likely to move upward. 

Rising trend lines, key support levels, and/or moving averages can serve as such bullish signals. As a prudent trader or investor, you should consider the preceding candles in addition to the bullish engulfing pattern to make a well-informed decision.

When a bullish engulfing pattern occurs after a period of bearishness, it is considered more reliable as it indicates a potential shift in the market trend. 

For instance, it has a higher probability of signaling a reversal when it follows four or more red candles. If you identify a bullish engulfing pattern, one way to trade it is to buy when the second candlestick closes above the midpoint of the first candlestick's body. You can place your stop loss below the low of the pattern.

Importance of color of the Bullish Engulfing Candlestick Pattern 

The color of the Bullish Engulfing Candlestick Patterns indicates whether the price direction is down (red) or up (green).  

Downtrend – when a large green candle engulfs a small red candle, forming a downtrend pattern. This indicates that buyers are gaining control, and a trend reversal is expected. 

How should you approach a bullish engulfing pattern trade?

Below are a few ways you can approach a bullish engulfing pattern trade:

1. You must wait for the candlestick pattern to form and then enter a long position when the next candle opens.
2. You can buy-stop order just above the high of the second candle.

What are the benefits of the Bullish Engulfing Candlestick Pattern?

Below are the benefits of the Bullish Engulfing Candlestick Pattern: 

• Potential Trend Reversal: This is an indication of the potential trend reversal. Following a previous bearish run, signifying that buyers are in full control of the market.
• Identify entry and exit points: traders can identify the pattern and potential entry points to invest and exit points to sell stocks.
• Set stop-loss levels: Investors can use a candlestick pattern to determine where to set stop-loss levels, to limit the loss. 
• Risk-reward ratio: Traders and investors can use the risk-reward ratio to control the capital and risk of loss. 

Limitation of using Bullish Engulfing Pattern

Once you identify a potential candle, you must choose the risk-reward according to your set-up. The bullish engulfing pattern necessarily doesn’t provide you with a price target. This can be complicated as any potential false signal or misinterpretation can make the trading setup void.

Thus, you must also use other indicators or trend analysis to complement the trade and determine a price target and exit strategy.

Conclusion 
The traders commonly use a Bullish engulfing pattern to cash in on the potential price increase in the market. Also, you must make sure to check and analyze the previous candles. If you find the previous downtrend to be more robust, you can ensure a more efficient engulfing pattern.