The Bullish Engulfing Pattern: Definition and Trading Strategy

A Bullish Engulfing Pattern is a Candlestick Pattern and occurs when a negative candle with a relatively small body is followed by a positive candle with a larger body. It is important that the body of the second candle fully encompasses the body of the first candle. Ideally, the second candle has no or only a very small wick at the top. This combination tells us a number of things:

  • The opening price of the second candle was lower than the closing price of the first candle, so the day starts with a gap down and sellers are in control.
  • However, during the trading session we notice that buyers get the upper hand and push the price up with a closing price that ends positively.
  • The shorter the upper wick of the second candle, the shorter the closing price at the highest price of that day, an even stronger signal that buyers really have the upper hand.

A Bullish Engulfing Pattern is a reversal pattern. It is an indication that the current existing downward trend (short or long term) is coming to an end and a positive trend reversal is imminent. The Bearish Engulfing Pattern is the counterpart of the Bullish Engulfing Pattern.

Example

In mid-February 2020, NCR breaks down and we see a clear downtrend lasting about a month. In mid-May, about a month later, the trading session ends with a doji-candle (candle 1 of our pattern). The next day (candle 2) the price initially opens a little lower than the closing price of the previous day but eventually the buyers enter the market and push the price up with a closing price significantly above the first candle. The upper wick of the second candle of the bullish engulfing pattern is short and shows that the closing price is close to the highest price of the day. As a result, the decline was halted and a new (interim) uptrend occurred.

Bullish Engulfing Trading Strategy: the entry setup

BUY STOP LIMIT (entry) - a few cents higher than the highest price of the second candle forming the engulfing pattern.

STOPLOSS (exit at market price) - either just below the lowest price of the second candle, or below the lowest price of the first candle forming the bullish engulfing pattern.

Tip: Which Order to Use when Buying Shares?

An example setup can be found on the chart below:



A few more points to consider

Not every bullish or bearish engulfing pattern will be successful! Good risk and trade management is at least as important to be successful in the long term. A few things you can consider to increase your success rate:

  • Only use the patterns in the direction of the existing long-term trend. For that long-term trend you can use, for example, the popular 200-day average. If the share price is below this average, the general trend is downwards. If the price is above the 200-day simple moving average, the trend is upward.
  • Within this long-term trend, look for interim trend movements that are opposite to the main trend. Suppose, for example, that share X is in a declining long-term trend and there is a short-term upward trend in the meantime. A bearish engulfing pattern that occurs within this shorter upward trend is more likely to succeed.
  • Signals are even more powerful when the pattern occurs at a significant level of support or resistance. A good example is a bullish engulfing pattern that occurs during a re-test of a previous support level. In this way, the pattern is combined with another known technical pattern indicating a possible trend reversal, namely a double bottom.
  • always check in advance whether any important news comes out for the company in the next few days, as this can trigger a strong reaction to the share price (greatly increased volatility). It often happens that such news causes the price to open a whole lot higher or lower the next trading day (gaps). This can cause the opening price to be a lot lower or higher (in case of a short position) than your current stoploss!

Bullish Engulfing Pattern Stock Screener.

Filtering stocks based on candlestick patterns can be done in the stock screening section under the tab indicators. You'll not only find the engulfing pattern there, but also numerous other popular candlestick patterns.

Find all Bullish Engulfing Patterns on the US markets today