The Bullish Engulfing Pattern 

What is the Bullish Engulfing Pattern? How and When Does It Form? 

It is a pattern that appears on the chart as two candlesticks, where one completely engulfs the body of the other. It signals a potential shift in market sentiment from selling to buying. 

How It Forms 

The first candle appears, and is usually small and bearish (red), reflecting the dominance of the Bears (sellers) in the market. 

This is followed by a second, large, bullish (green) candle, which completely engulfs the body of the first candle. 

For the bullish engulfing candle to form, the second candle (the bullish engulfing candle) must open lower than the closing price of the first bearish candle. Then, the Bulls (buyers) push the price higher so that the second candle closes above the opening price of the first candle. For the engulfing to be complete, the second candle must completely cover the entire range of the first candle (from high to low). 

When It Appears 

The pattern can appear in any market and on any timeframe, but it is most effective and reliable when it appears after a downtrend. 

It can also appear during periods of consolidation, indicating a potential bullish breakout in the price. 

What the Pattern Tells Us 

It signals a shift in control from the Bears (sellers) to the Bulls (buyers). The price opens lower than the previous day’s close and closes higher than its open, indicating that the Bears controlled the price during the morning trading session, but the Bulls decisively took complete control by the end of the day. 

The absence of an upper wick or tail (or when it is very small) provides a stronger indication that the price was still rising vigorously at the end of the trading day. 

Bullish Engulfing Pattern vs. Bearish Engulfing Pattern 

The Bearish Engulfing Pattern is the exact opposite of the Bullish Engulfing Pattern, both in form and signal. 

The Bearish Engulfing Pattern appears after an uptrend and indicates a potential bearish reversal. The first candle is bullish (green), followed by a second, larger bearish (red) candle that completely engulfs the body of the first bullish candle. 

How to Trade the Bullish Engulfing Pattern 

• Identify the pattern on the chart: Look for a large green candle that engulfs a small red candle before it. 

• Confirm the pattern using the surrounding candles: 

• Observe the preceding candles: The more red (bearish) candles the bullish candle manages to engulf, the stronger and more reliable the pattern’s bullish reversal signal becomes. 

• Observe the following candles: If another green candle follows the pattern and closes above the price of the bullish engulfing candle, this is a strong confirmation of Bull (buying) control. 

• After confirming the pattern, you can open a buy position (Long Position) and place a stop-loss order at the low of the candle or below the lower wick/tail of the engulfing candle (if present). 

• Monitor the market closely to avoid false signals and ensure the market moves in the expected direction. 

Accuracy and Reliability of the Bullish Engulfing Pattern 

In terms of reliability, this pattern is particularly reliable when it appears after a prolonged downtrend. This is due to its clear signal of a significant shift in market sentiment, with control moving from Bears (sellers) to Bulls (buyers). This shift is sufficient to push the price higher. 

As for accuracy, the pattern’s overall performance after a reversal isn’t the best, ranked at 84%, which is considered low. However, the reversal itself occurs in 63% of cases, with the price closing above the engulfing candle’s peak and continuing its upward movement, reflecting a high degree of signal accuracy. 

Limitations of Trading the Bullish Engulfing Pattern 

• The pattern can sometimes give false signals, misleading traders into thinking a bullish price reversal is imminent, causing them to enter long positions while the downtrend continues. 

• It is difficult to determine a profit target in candlestick patterns because there is no clear price goal. Traders must combine them with other technical analysis tools to identify profit-taking opportunities. 

• The pattern needs to be ”backtested“ before being incorporated into any trading strategy. This is to ensure its effectiveness and reliability and to determine the specific timeframe in which you are trading. 

• If the pattern appears with low trading volume, its signal reliability is significantly reduced. Increased trading volume often leads to a strong bullish engulfing and confirms that Bulls (buyers) have firmly established control of the market. 

In nutshell 

The Bullish Engulfing pattern is not profitable on its own, but when combined with other technical analysis tools and risk management strategies, it becomes a reliable signal and makes your position profitable. 

You can confirm the reversal signal using tools such as the MACD indicator and the RSI (Relative Strength Index). To protect your capital and limit potential losses, always be sure to use stop-loss orders. 

Visit the Education and Analysis section at Naqdi to learn more about the patterns and indicators used in technical analysis.