Bullish Engulfing Candlesticks helps in identifying an uptrend reversal in the market. This candlestick pattern stands out because a trader does not need to wait until the entire pattern is completed to enter a trade. As soon as a red (downtrend) candlestick is engulfed by a green (uptrend) candlestick; traders can enter long positions and trade the reversal. In our article, we will learn about the Bullish Engulfing Candlestick in-depth and how to trade with it.
What does an Engulfing candle mean?
An Engulfing Candle is a technical chart pattern where a candlestick in the opposite direction of the existing trend engulfs or surrounds the candlestick in the current trend. The pattern comprises two or more candlesticks that trade in the opposite direction of the initial trend.
- The first candlestick is smaller in size with shorter wicks compared to the succeeding candlesticks, indicating a prior uptrend or downtrend coming to an end.
- The second candlestick, which is larger in size, suggests that the currency pair has opened at a significantly higher or lower level compared to the previous day's close, marking a market trend reversal. The reversal is confirmed if more candlesticks in the same direction appear on the same trading day.
What is a Bullish Engulfing Candlestick?
A Bullish Engulfing Candlestick is a reversal signal in the existing trend as buying pressure increases in the market, further increasing the currency pair prices. It includes two candlesticks, where the second candlestick is a bullish candle, which completely engulfs the preceding bearish candlestick. The bullish candlestick appears right after a few short bearish or red candlesticks, indicating a bearish trend coming to an end before the market reverses. This results in an uptrend reversal. The Bullish Engulfing Candle first occurs at the end of a downtrend and is followed by several green candlesticks thereon.
Example of a Bullish Engulfing pattern
Let us consider that you want to trade USD/EUR, which has been in a downtrend for the last few days, trading at 2. In the present day, the currency pair opens at 2.2, trades at 1.5 during the day and finally closes at 1.8. on this day, you do not open any new trades for the currency pair. The next day, USD/EUR opens at 2.5 and marks several high price swings during the day, which results in the formation of a bullish candlestick completely engulfing the previous day's bearish candlestick. The large bullish candlestick that is formed the next day signals an uptrend reversal, providing you with opportunities to long the trade. You enter a USD/EUR trade during the early hours of trading at the price level of 2.8 and wait for the market to continue upwards. The currency pair closes at 3.8 after making a high of 4.2. The next day, the market again opens at 3, continuing the uptrend and breaking the previous day's high to trade at 4.5. At this point, you decide to sell your trade to gain around 65% on the trade (because 4.5 (selling price) - 2.8 (buying price) = 1.7 (profit), which is equal to 65% of 2.8)
What do Bullish Engulfing Candlesticks tell traders?
1. Trend reversal
The Bullish Engulfing Candlesticks provide traders with reversal signals in the forex market since they are spotted either at the top (high) of an uptrend or the bottom (low) of a downtrend. Whenever an engulfed candle is spotted at the end of a downtrend, it provides an uptrend reversal signal, and whenever it is spotted at the top of an uptrend, it provides a downtrend reversal signal. Since Bullish Engulfing Candlesticks occur at the low of a downtrend, they are uptrend reversal signals that provide traders with price levels to long or buy a trade.
2. Trend continuation
Bullish Engulfing Candlesticks also provide traders with market trend continuation signals when it is spotted during an existing uptrend. When a larger green candlestick appears after a comparatively smaller sized green candlestick, it signals that the market is still in an uptrend and will continue rising in the upward direction.
3. Entry levels
The Bullish Engulfing Candlestick also tells traders when to enter or long trade since they appear at the bottom of a downtrend signalling an uptrend reversal.
How to identify the Bullish Engulfing Candlestick pattern?
- Identify the prior trend consisting of several bearish or red candlesticks that indicate a bearish trend.
- Right after the last bearish or red candlestick, identify a bullish or green candlestick that completely engulfs (covers) the previous candlestick.
- The larger candlestick should be followed by a few more green candlesticks to confirm the uptrend reversal.
- The lower wick of the green candlestick should end below the lower wick of the red candlestick, whereas the upper wick of the green candlestick should end above the upper wick of the red candlestick to signal that the market is accelerating upwards with increasing buying pressures and strengthening engulfing pattern signals.
- When a pattern forms with several red candlesticks followed by several green candlesticks that are larger in size with longer wicks, a Bullish Engulfing Candlestick pattern is identified.
- The Bullish Engulfing Candlestick pattern is further confirmed when the green candlestick closes above the opening price of the red candlestick.
Bullish Engulfing Pattern VS Bearish Engulfing Pattern
A Bearish Engulfing Candlestick is a reversal signal in the existing uptrend as selling pressure increases in the market, further decreasing the currency pair prices. It includes two candlesticks where the second candlestick is a bearish candle, which completely engulfs the preceding bullish candlestick. The bearish candlestick appears right after a few short bullish or green candlesticks, indicating a bullish trend coming to an end before the market reverses. This results in a downtrend reversal. The Bearish Engulfing Candle first occurs at the end of an uptrend and is followed by several red candlesticks thereon.
- A large bearish candlestick indicates that the market is opening and closing significantly below the previous day’s open and close price. Whereas a large bullish candlestick indicates that the market is opening and closing significantly above the previous day’s close and open price.
- The Bearish Engulfing pattern starts with a short green candlestick and ends at several large red candlestick, whereas the Bullish Engulfing Pattern starts with a short red candlestick and ends at several large green candlesticks.
- The Bearish Engulfing Pattern provides traders with opportunities to short and the Bullish Engulfing Pattern provides them with opportunities to long the trade.
How to use the Bullish Engulfing Pattern in forex trading?
- Open a forex trading account and choose the currency pairs you want to trade.
- After deciding the currency pairs you want to trade, move to the available candlestick pattern and choose the Bullish Engulfing Pattern to analyse the market trend.
- Once you identify the Bullish Engulfing Pattern appearing right after a bearish trend as larger green candlesticks form, place a long order at the exact point where the Bullish Engulfing Pattern begins or at the upper wick of the candlestick.
- Place a stop-loss order below the latest swing low that occurred during the bearish trend.
- Monitor the market after placing the long order and stay in the market till the uptrend continues.
Limitations of Engulfing Patterns
1. Not useful in choppy trends
The biggest limitation of using an Engulfing Pattern is that they are only useful when there is a clean downtrend or uptrend in the market, which can provide traders with clear reversal signals in the opposite direction. This means the Engulfing Patterns are not very useful when the market trend is choppy or not following a particular direction.
2. Does not provide price targets
Engulfing candlestick patterns do not provide traders with specific price targets, which makes it tough for them to analyse the right time to exit the profitable trade. Instead, when using Engulfing Patterns, traders need to combine their trade analysis with different indicators that help them identify the price targets.
3. Cannot be used independently
Engulfing Patterns cannot be used independently as they are unable to tell you the overall long-term market trend of the currency pair. This means that when using Engulfing patterns, you need to combine your trading analysis with other indicators to confirm the market signals and identify long-term trends.
How reliable is Bullish Engulfing?
Bullish Engulfing is a reliable pattern when combined with other techniques in the forex market. They provide traders with reliable buying signals and help them place suitable long orders. Here is how traders can confirm that the bullish Engulfing formation is reliable –
- Identify if the previous trend pattern hits a significant low before closing and opens at a higher price with a gap the next day, followed by several more bullish candlesticks.
- Ensure that the second candlestick in the bullish Engulfing pattern is much longer than other candlesticks in the pattern, especially covering the entire body of the previous (bearish) candlestick.
- Spot the support lines in the forex pattern and see if the Bullish Engulfing candlestick's lower wick has touched but quickly retraced from the support line. This confirms a strong upward movement. The support line is the point at which falling prices stop falling and start increasing, and that is why if the pattern touches the support level but quickly retraces back, it is most likely to follow an uptrend.
- Wait for at least two or three bullish candlesticks to appear right after the first bullish candlestick in the pattern to confirm the beginning of a trend reversal.
The absence of any one of the following cases can result in a weak Bullish Engulfing pattern, so a trader should ensure that all these four cases exist in the pattern for high reliability.
Start trading with the Bullish Engulfing Pattern and spot forex entry levels
Bullish Engulfing Pattern can help you find the right price levels, especially during a market reversal, allowing you to enter the market at the right time. Start trading with Blueberry and apply several candlestick patterns to experience seamless forex trading. Sign up for a live trading account or try a demo account on Blueberry.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. Traders should carefully consider their objectives, financial situation, needs, and level of experience before entering into any margined transactions.