Bullish Engulfing Pattern: Everything You Need To Know
A bullish engulfing pattern refers to a price chart symbolizing a bullish reversal in the price performance of a security. The popular technical analysis indicator is often leveraged by traders to identify bullish uptrends in an asset's price.
Published on 28 February 2023
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If you want to use it correctly, you will find multiple conditions to discover a bullish engulfing pattern. But how should you use the bullish engulfing pattern? More importantly, how can you identify such a candlestick pattern? Scan between the lines to discover more about the candlestick pattern.
Describing a Bullish Engulfing Pattern
The second candlestick in a bullish engulfing candlestick will close higher than the previous day's opening price. However, the second candlestick will be opening at a price lower than that of the previous day’s closing price.
The candlestick of the second day will be in the form of a white candlestick. It refers to a price chart pattern with the closing price higher than the opening price for a specific period. In recent times, most charts have indicated the white candlesticks in green.
You will be able to detect a bullish engulfing pattern by spotting a small bearish black candlestick. Following the black candlestick, you will also come across a large bullish white candlestick. The white candlestick goes beyond the body of the former.
Indications of a Bullish Engulfing Pattern
A bullish engulfing pattern should not be interpreted simply. The white candlestick represents an upward price movement, while the following black candlestick represents a downward price movement. But it also goes way beyond that.
As you already know, the candlestick gets formed when stocks open at a lower price on the second day than they closed on the previous day. When there isn’t any gap in the price, the white candlestick won’t be able to engulf the body of the black candlestick from the last day. Therefore, the engulfing candle in the pattern indicates a day on which stock prices were controlled in the morning by bears and were taken over by bulls by the end of the day.
If the bullish pattern comes with any upper wick, it is usually quite small. It symbolizes that the stock closed at its highest price, or at least near it. Therefore, it proves that the day came to an end with a surging upward trend.
A small upper wick, or the lack of one, suggests that a white candlestick will be produced the next day. Moreover, the white candlestick is likely to close higher than the bullish pattern.
But there’s also a possibility that a black candlestick will be produced the next day after gaping up during the opening. Remember that analysts pay more attention to bullish engulfing patterns because they often indicate trend reversals.
How Can You Leverage the Bullish Engulfing Pattern?
Traders can rely on the bullish engulfing candlestick to spot changes in market sentiment in case of security. But the pattern must be utilized along with various other indicators to predict the future price movement of securities.
A bullish engulfing candlestick can usually be spotted after a massive downtrend in the price of an asset. Any valid bullish candlestick will cover the real body of the previous candle. But it won’t be surrounding the shadow.
Some other conditions that signify a valid bullish engulfing pattern are as follows:
The security must be showing a definite downtrend before a bullish engulfing pattern appears.
The second day of such a pattern must feature a white candlestick. The opening price of the second day needs to be lower than the closing price of the previous day.
The closing price of the second day needs to be higher than the opening price of the black candlestick from the last day.
Comparing Bullish Engulfing Pattern with Bearish Engulfing Pattern
If you are wondering what a "bearish engulfing pattern'' is, it’s the exact opposite of a bullish engulfing pattern. A bearish engulfing pattern happens after a massive uptrend in the price of an asset.
A bearish engulfing pattern involves an upward candlestick on the first day. On the second day, a larger, downward candlestick engulfs the upward candlestick of the first day.
In a valid bearish engulfing pattern, the opening price of the second day needs to be lower than the opening price of the preceding day. A bearish engulfing pattern is associated with weakened investor sentiment for an asset.
The technical chart pattern indicates lower prices in the future. The pattern is beneficial because it shows that sellers have taken over the buyers and are aggressively pushing the prices downward.
Final Words
The bullish engulfing pattern indicates that buyers are in temporary control. It can be calculated using the market structure, area of value, entry trigger, and exit formula.
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