Bullish Engulfing Candlestick Pattern
Bullish engulfing pattern, also known as bullish engulfing candle or bullish engulfing candlestick, is one of the most commonly used technical indicators in stock trading. It is a bullish reversal candle pattern that is used to signal the end of a downtrend and the beginning of a new uptrend. Read on to know everything about the bullish engulfing candlestick pattern.
Understanding the Bullish Engulfing Pattern
A bullish engulfing candlestick pattern is a two-candle pattern, where the first candle is bearish, and the second candle is bullish. The second candle completely engulfs the body of the first candle, which means that the second candle opens below the first candle’s low and closes above the first candle’s high. This indicates that the bulls have taken control of the market, and the stock price is likely to go up.
It is a strong signal because it shows that the buyers have overwhelmed the sellers, and the stock price is likely to continue its upward momentum. It is important to note that the bullish engulfing candlestick pattern is only significant when it occurs after a downtrend. If it occurs after an uptrend, it is less reliable and may not indicate a trend reversal.
Identifying this Candlestick Pattern
Identifying the bullish engulfing is relatively straightforward. You need to look for a two-candle pattern, where the first candle is bearish, and the second candle is bullish. The second candle should completely engulf the body of the first candle. The wicks of the two candles can be of any length, but the body of the second candle should be larger than the body of the first candle.
Furthermore, such structure can occur in any time frame, from intraday to weekly or monthly charts. However, it is more significant when it occurs on higher time frames, such as weekly or monthly charts.
Interpreting the Bullish Engulfing Candlestick
The bullish engulfing pattern signals a potential reversal of a downtrend, as the second bullish candlestick engulfs the entire body of the preceding bearish candlestick, demonstrating that the buyers have gained control. Traders can interpret the sequences in several ways.
- Firstly, they can be used as a buy signal. Traders can enter a long position when the second candle of the bullish engulfing closes above the high of the first candle. They can set their stop loss below the low of the first candle and target a profit based on their risk-reward ratio.
- Secondly, the bullish engulfing pattern can be used as a confirmation signal. Traders can use other technical indicators, such as moving averages or momentum indicators, to confirm the pattern’s signal. If other technical indicators also show a bullish signal, traders can enter a long position with more confidence.
- Thirdly, they can be used to identify support levels. When the sequence occurs near a significant support level, it indicates that the support level is holding, and the stock price is likely to bounce back. Traders can use this information to set their stop loss below the support level and target a profit based on their risk-reward ratio.