Bullish Engulfing Pattern Meaning Candlestick Examples

Bullish Engulfing Pattern Meaning

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This two-candlestick pattern indicates that the bears or sellers pushed the financial asset’s price lower in the green candle. However, in the same trading session, the bears lost strength, and the bulls managed to take complete control, driving up the price above the red candle’s high. A bullish engulfing pattern confirmation helps traders identify attractive entry levels.

Key Takeaways

The bullish engulfing pattern refers to the formation of two candles in a downtrend; the second (bullish) candle completely overlaps the previous (red) candle’s body.Analysts interpret the formation of this pattern as a potential bullish reversal.When the candles appearing after the green candle have a higher closing price or if the red candle is a doji, the chance of a trend reversal is extremely high.The bullish engulfing pattern confirmation helps individuals spot attractive entry points that can generate significant financial gains.

Bullish Engulfing Candle Pattern Explained

The bullish engulfing pattern means a two-candlestick pattern, where the second (green) candle’s body completely engulfs the first (red) candle’s real body. In other words, the green candle closes above the red candle’s opening price after opening lower than the latter’s closing price. It signals a potential reversal of investor sentiments, suggesting that a financial asset’s price might move upwards shortly after reaching the minimum value over a certain duration.

The second candle signified a day when immense selling pressure was in the morning. Nevertheless, later on, the bulls decisively took over, pushing the price past the previous day’s opening price before the market’s closing bell.

Traders can get strong signals of a potential bullish reversal when the red candlestick is a doji candle or when the candles that form after the two-candlestick pattern close above the green candle’s high.

How To Trade Bullish Engulfing Pattern?

A trader’s response after spotting a bullish engulfing candlestick pattern depends on their position in a financial asset. Since a bullish engulfing candlestick pattern appears after a downward price trend, many traders take a short position when the bears are in control. However, traders must choose a different strategy as a trend reversal materializes.

The bullish engulfing candlestick pattern encourages traders to hold a long position. In other words, traders must buy the security and hold it in their portfolio until they can sell it at a higher price to make financial gains. Note that traders can make maximum financial gains if they buy the security at its lowest intraday price on the candle’s second day.

That said, there are typically three main situations wherein a trader may buy a financial asset using this pattern. So, let us look at them.

Individuals may buy a stock when its price surges from the gap down on the second day. However, the rally in price could represent a reversal of market sentiment per traders’ interpretation if the volume increased significantly along with the stock price.A trader might want to purchase a financial asset a day after the two-candlestick pattern appears on the chart. One chooses to wait for a day to confirm the bullish reversal.Individuals might choose to wait for another signal after this pattern formation. This sign is primarily a price break on the downward resistance line.

Examples

Let us look at a few bullish engulfing pattern examples to understand the concept better.

Example #1

After rejection at $43,000 on April 21, Bitcoin price plunged to $37,386 on May 1, 2022. On May 5, a bullish engulfing candlestick appeared on the cryptocurrency’s candlestick chart as the price briefly increased above the $40,000 mark. However, a trend reversal failed to materialize, and the price moved downward. This shows that the appearance of this pattern does not confirm a bullish reversal. Traders must remember this before taking a position in a financial asset.

Example #2

Let us say that Paul was observing DBC stock’s candlestick chart to look for an entry point. The stock’s price had been falling for the past two weeks. He identified a bullish engulfing candlestick pattern in a downtrend. He waited a day to see if the price would continue rising. The next day, he saw that the bulls were in control. Hence, he purchased 500 shares of DBC at $10 per unit.

The stock’s price jumped further, and it was clear to him that the two-candlestick pattern at the bottom of the downtrend triggered the bullish reversal. Shortly after, He sold the stock at $13 per share and made a profit of $1,500.

Piercing Pattern vs Bullish Engulfing

A bullish engulfing is similar to a piercing pattern; it signals a potential bullish reversal. However, there are a few differences. In the case of the former, the green candle completely engulfs the red candle. On the other hand, in the case of a piercing pattern, the green candle partially engulfs the red candle. The overlap is between 50% and below 100%.

Differences Between Bearish And Bullish Engulfing Patterns

Before trading financial securities using such indicators, individuals must know the crucial difference between bearish and bullish engulfing patterns. A bearish engulfing pattern is the opposite of its bullish counterpart. In the case of the former, the first candle is green, and the second candle is red.

The second candle’s body entirely overlaps or engulfs the first candle’s real body. On the flip side, in the latter case, the second candle is green and completely engulfs the previous red candle.

Individuals can spot a bearish engulfing pattern at the end of an uptrend, signaling a potential bearish reversal, unlike the bullish pattern. Hence, many traders take a short position in a financial asset after spotting a bearish engulfing pattern.