A bullish engulfing pattern is identified when a smaller bearish candle (often depicted as black or red) is followed by a larger bullish candle (often portrayed as white or green) that completely engulfs the body of the previous day’s bearish candle. This powerful pattern can signal a potential reversal in the current downtrend.
Key Takeaways
- A bullish engulfing pattern forms when a small bearish candlestick is followed by a large bullish candlestick that completely engulfs the body of the previous day’s candlestick.
- These patterns are strong indicators of trend reversals when preceded by several consecutive bearish candlesticks.
- Traders rely on the entirety of preceding candlesticks to confirm the bullish engulfing pattern’s indication of a trend reversal.
Understanding a Bullish Engulfing Pattern
The bullish engulfing pattern is a two-candle formation signaling a robust reversal. The second candle entirely ’engulfs’ the real body of the first, irrespective of tail shadows.
This pattern emerges in a downtrend, characterized by a dark candle followed by a larger, hollow candle. On the second day, the price opens lower but buying pressure pushes the price significantly higher, signaling an overt win for buyers.
It’s prudent to enter a long position when the price surpasses the high of the second engulfing candle, confirming a downtrend reversal.
What Does a Bullish Engulfing Pattern Tell You?
To identify a genuine bullish engulfing pattern, the next day’s stock price must open lower and close higher than the prior day’s. This formation suggests buyers seized control throughout the day after initial selling pressure, often closing at or near the day’s high, minimalizing upper wicks.
This pattern increase the odds of a bullish continuation, making it crucial for traders monitoring market trends.
Bullish Engulfing Pattern vs. Bearish Engulfing Pattern
Contrary to bearish engulfing patterns that forecast declines, a bullish engulfing pattern indicates rising prices. This involves a down candle followed by a significantly larger up candle fully engulfing the smaller down candle.
Example of a Bullish Engulfing Pattern
Historically, Philip Morris (PM) stock showcased a notable bullish engulfing pattern on January 13, 2012. The stock price jumped from $76.22 upon opening to close at $77.32, an overtaking momentum against the previous bearish day, signaling a potential trend reversal.
Bullish Engulfing Candle Reversals
To confirm trend reversals, traders should not only focus on the two candlesticks forming the bullish engulfing pattern but also on the preceding trend. Multiple consecutive bearish candlesticks enhance the pattern’s strength and reliability.
Acting on a Bullish Engulfing Pattern
Traders assessing a bullish engulfing pattern tend to gauge changes in market sentiment. Higher trading volumes coupled with price movements influence decisions. Some traders enter positions at the end of the bullish engulfing day, while others wait until further validation the next trading day for added confidence.
Limitations of Using Engulfing Patterns
Though compelling, bullish engulfing patterns have limitations. They work best following clear downward trends. If market actions are irregular, the pattern’s significance diminishes. The typically large engulfing candle may necessitate big stop losses, complicating risk-reward assessments and other strategic exits reliant upon complementary indicators or analysis techniques.
References
- StockCharts. “Phillip Morris - January 2012”.
