Let me start by saying that if you are unfamiliar with candlestick charts and how they work, please read Introduction to Candlestick Charts before going too in depth with the individual patterns. It will make all that follows so much easier to understand.
The Bullish Engulfing
A Bullish Engulfing is a candle pattern that indicates a reversal, is bullish (to the upside), and usually occurs near the end of a downtrend. This pattern features two candlesticks, with the first usually being bearish, and the second bullish. The name comes from the body of the second candle engulfing the body of the first candle.
Bullish Engulfing Formations
A Bullish Engulfing is formed by two candles. The first candle forms when the market is in a downtrend. The price closes near the bottom of the time period. As a result, the black or red bearish candle is formed, which represents the first candle of the pattern. There are occasions where the first candle of the Bullish Engulfing is green, but they are a little harder to find and usually consist of a Doji or small candle. The next trading period the price opens below the low end of the body of the previous bearish candle, in a gap down.
Sellers are beginning new short trades, and those who may already be short in the market may be adding to their positions. Bulls creep in and start accumulating shares from sellers. As the bullish demand increases the bearish momentum decreases, and as a result the price begins to rise. As bulls continue to add to their long positions, the price increases more and by the end of the session, the closing price is higher than the body of the previous candle. As a result, this forms the bullish white or green candle, which engulfs the real body of the previous bearish candle.
Trading the Bullish Engulfing
For the Bullish Engulfing to be a reliable reversal and buy signal, there needs to be a clear downtrend established. Study the chart below, and if all 5 points are hit, buy it! If it becomes obvious that the buyers are taking control of the market, this pattern (much like the Doji and Hammer) indicates that the possible bottom of the downtrend and reversal may be unveiling.
If the body of the first candle is very short, while the body of the second is very tall, the importance of this pattern increases. If the second day has relatively high volume, it is likely a minor downtrend within a major uptrend.
If you are short on the position, a Bullish Engulfing should signal you to take some sort of action during the next trading period. A long position can be entered above the high of the second candle. You can place a stop order below the low of the overall pattern to limit your losses, should the downtrend continue.
If you have any questions, please feel free to comment. If you learned something knew, share it with others.
Remember to stay in your "Trader Mentality."
Labels: Charts 101, Technical Analysis
