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Bullish engulfing pattern in candlesticks
Bullish engulfing pattern in candlesticks

Author
Alan Tsagariev

Reviewed by
Jana Keen
The bullish engulfing pattern indicates a near-term reversal from bearish to bullish for the ongoing trend. A bullish engulfing candle is a bullish candle whose closing price is higher than the opening of the previous day, after opening lower than the previous day's close. This is a reversal pattern in candlestick analysis.
The article covers the following topics:
What is the bullish engulfing candle pattern?
How do you find the engulfing candle pattern?
Trade the bullish engulfing candle pattern
Examples of the engulfing pattern
How to trade the bullish engulfing pattern
The difference between the bullish and bearish engulfing patterns
Conclusion
Frequently Asked Questions about the bullish engulfing pattern
What is the bullish engulfing candle pattern?
The bullish engulfing pattern consists of two Japanese candles, with the second candle being bullish and engulfing the first.
The bullish engulfing pattern appears at the lowest point in the bearish trend and indicates that the price has reached a strong support level and that buying pressure is increasing.
This pattern can often be seen when trading in the forex market. It is more evident in stock charts since gaps in these instruments are more common, making it easier to find a bullish engulfing pattern on the chart. This formation can also be found in commodity and cryptocurrency markets.

Therefore, for example, in the daily chart of Ford Motor Company shares, after a series of bullish engulfing patterns appear, the trend shifts to bullish.
The price reaches a strong support level and bounces off it three times. This is a signal to open a buy position.

How do you find the engulfing candle pattern?
It is easy to find a bullish engulfing pattern in the candlestick chart. The pattern must meet three criteria:
It is essential to identify the direction in which the price is moving. In the case of a bullish engulfing pattern, there should be a clear bearish trend, as the pattern appears at the bottom. The bearish trend can be long-term or short-term. However, such patterns may arise when the asset is in a long-term consolidation state, forming a new starting point for growth.
It is important that the body of the second bullish candle covers the body of the first candle. Shadows do not matter.
The second candle must be bullish, usually white or green. The first candle should be small and bearish, in red or black. However, there are exceptions where the colors of the first and second bullish candles match. For example, if the real body of the first candle is small or completely absent. A small candle body or its absence is what distinguishes a doji candle, which is also a sign of an imminent bullish price reversal and highlights a state of indecision in the market.

Trade the bullish engulfing candle pattern
When trading any asset, it is important to first identify support and resistance levels to determine potential pivot points. Additionally, it is important to control trading volumes and market orders according to market depth. Based on this data, along with candlestick and indicator analysis, it is possible to identify a more profitable entry point.
It should be emphasized that the bullish engulfing candle pattern belongs to the category of reversal patterns, which allow a trader to easily identify the pivot level.
Factors that increase the likelihood of a trend reversal when a bullish engulfing pattern appears:
The first candle in the pattern is short, while the second bullish candle is very long. This indicates that the bears' grip is beginning to weaken, and the bulls are starting to gain control of the market.
The bullish engulfing pattern forms after a long bearish trend.
A bullish candle forms on high trading volume, indicating a consensus among market participants at a certain price level, where the market turns bullish.
Another factor that reinforces the trend reversal is when the second candle is larger than the previous candle.

Confirmation of the engulfing pattern
There are many price movement patterns and combinations in candlestick analysis that can confirm a bullish engulfing pattern. Additionally, to ensure a trend reversal when a bullish engulfing pattern appears, you can use the simplest technical analysis indicators. It is enough to add stochastic indicators or RSI to the chart, which allows you to identify areas where the trend may reverse in advance.
If a bullish engulfing pattern forms in such a zone, and there are other candle patterns confirming the bullish reversal, we can consider a buy trade. Larger price patterns, such as double bottoms, descending wedges, ascending triangles, etc., can also serve as confirmation for the engulfing pattern.
Let's take a closer look at the EURUSD four-hour chart. The figure below shows a bearish trend. There are many bullish reversal signals at the bottom of the trend:
There is the descending wedge pattern, and the price breaks it upwards;
The Relative Strength Index indicates a bullish divergence, warning of the exhaustion of the bearish trend and that the price may rise;
The Relative Strength Index rebounds from the lower limit;
The MACD indicator breaks above the zero level in a bullish direction;
There is a series of reversal patterns: hammer, inverted hammer, and bullish engulfing.
The combination of these signals means that the price has reached a local low, and we can enter a buy trade.

Reduce your risks using stop-loss orders
Before opening a trading position and setting stop-loss levels, support and resistance levels must be determined.
When you identify a bullish engulfing pattern and enter a buy trade, you should set a stop-loss order below the pattern or support level. If the engulfing pattern is confirmed using other candlestick patterns or technical indicators, and there is also confidence that the trend is changing direction, then you can set the stop-loss below the previous local lows. For example, as in this example, the stop-loss can be placed below the formed reversal hammer pattern.
In both cases, you must calculate the risks and act according to money management rules, as any trader aims to make profits, not lose money. Avoid high risks, even if the potential profit is lower.

Support and Resistance Levels
Support and resistance levels are among the most important components of trading because with the correct identification of these levels, you can develop a profitable and effective trading strategy.
In fact, the bullish engulfing signal, along with other patterns at a certain support level, serves as a warning to market participants that a reversal is imminent. The resistance level, in this case, is a rough target for profit taking. That is, by identifying support and resistance levels, you can find more profitable entry and exit points while reducing risks.
The chart of gold XAUUSD below shows the distribution of key support and resistance levels. Since the bullish engulfing pattern indicates that the price should rise and there is a clear bullish trend in the chart, we will be more interested in resistance levels to determine profit-taking points.
After an extended consolidation period, a support level is identified, where a bullish engulfing pattern forms. At this stage, a buy trade should be entered, and a stop-loss order should be placed below the support level.
After analyzing the previous period chart, resistance levels were identified in a grid formation. Therefore, profit taking should be set in a grid format with a profit taking of 50% of the total trade size.
When the highest resistance level is reached, the price forms a bearish engulfing pattern. This is a signal to exit the trade with a profit.
As you can see, support and resistance levels have a strong advantage, as they indicate liquidity accumulation levels, which when breached signal the continuation of price movement.

Examples of the engulfing pattern
Let's take a closer look at the bullish candle in forex trading. I will use the Swiss franc USDCHF chart as an example. You can see in the chart below that the price has drawn a bullish engulfing pattern at the support level.
Additionally, if we consider individual candles, a doji pattern forms on the first day, indicating a state of indecision in the market. On the second day, a bullish inverted hammer candle appears, indicating a reversal. The first engulfing pattern is confirmed by another inverted hammer and a bullish engulfing.
As you can see, after bullish patterns, a rise begins that lasts for three weeks.
In such a case, it is appropriate to enter a buy trade with a stop-loss below the support level.