Bullish engulfing is a bullish candlestick pattern used in technical analysis for stock trading. Even though this is a reversal pattern, but engulfing pattern sometimes works well as a continuation pattern also.
Bullish engulfing pattern is composed with two candlestick. One is red candlestick and another one is green candlestick. Successful Formation of this candlestick pattern depends on the following factors:
1: Day 1 Candlestick: Day one candle is red candle. This candle has relatively small body and small upper and lower shadow. In the chart, Day one candlestick has small body and small shadow on both upside and downside. This candle also indicates downward trend becomes weaker.
2: Day 2 Candlestick: Day two candlestick is big white candlestick with no upper and lower shadow. This candle completely engulf the previous day small red candle. This candlestick pattern works better if second day open is gapped down, engulf the first day candle completely and closed above the high of the first day candle. Pattern strength depends on the second day candle because second day candle completely change the mind set of stock trader. Before the second day everyone thinks stock is in the down trend, and bear traders hold their position happily. In Day 2 a group of stock buyers started to buy stock and short seller started to lose their strength to bullish stock trader. As Day 2 candle engulf the Day 1 candle, a group of short seller already leave the position that also accelerates the buying and day candle becomes even stronger. In the chart, green candle gapped down and engulf the whole body of day 1 candle. At the end of the day, green candlestick closed very strong. Yellow line in the chart shows high of the day 1 candle and day 2 candle closed almost doubles in day 1 candle.
3.Support Line: Bullish engulfing works better in support line. Support line could be trend line, moving average or Fibonacci retracement. Stronger the support line, reliability of the bullish candlestick patterns are better.
Trade Setups for bullish engulfing pattern:
Pattern recognition for bullish engulfing:
- A strong downtrend: Even though bullish engulfing candlestick pattern is seen in continuation pattern, this pattern gives most reliable result in after an establish downtrend. In the XRAY chart, we see a strong downtrend before the bullish engulfing pattern.
- Low volume: Day 1 should have low volume with small body, upper shadow and lower shadow. However, Day 1 should not be a doji day. Low volume indicates down trend is weakening and a possible reversal is coming.
- High volume day: Day 2 should have above average volume with engulfing white candle. If Day 2 candle is gaped down and engulf day 1 one candle with big volume, this is a reliable bullish engulfing pattern.
How to trade:
Stock trader entered the trade after the bullish engulfing pattern is formed. When price will exceed or overcome the high of the Day 2 candle, trader should get in to the trade. In the XRAY chart, Trade entry is shown by blue line. In the chart, stock gaped up above the high of day 2 bar and never pull back. This is even good sign. Because this indicates stock has a lot of demand and number of stock buyers exceed the sellers. Trader should hold the stock until stock reached to trader target price.
Trader should exit the trade if pattern is broken and stop loss is triggered. In the XRAY chart, Yellow line indicates the exit point of the trade. If price goes below the yellow line or price closed below the yellow line, trader should leave the position and stop loss should triggered. The reason behind this is that when stock closed below the yellow line, that means potential reversal is completely failed and downtrend is presumed again.
Bottom line: Bullish engulfing pattern is a popular candlestick pattern used in technical analysis for stock trading. This bullish pattern gives better result after an established down trend than the continuation of the existing trend. Even though success of this trade setup depends on how symmetrically this set up was used with other technical analysis indicators.