The Bullish Engulfing Pattern

The Bullish Engulfing pattern is a bullish reversal candlestick pattern at the bottom of a downtrend. Candlestick are used in technical analysis. This specific pattern consists of two candles where the second bullish candle completely envelops the body of the first bearish candle as a sign of bullish momentum.

In this article

What is a Bullish Engulfing Pattern?

bullish engulfing candlestick pattern

bullish engulfing candlestick pattern
A bullish engulfing pattern is a reversal pattern in technical analysis and involves two candles, the first candle is negative and it is followed by a second positive candle which includes at least the full body of the previous negative candle. If the pattern occurs after a previous downtrend it means that the downward momentum is losing strength and with it the negative sentiment. The pattern is a sign of upward price pressure and thus signals the possibility of a trend reversal.

bearish engulfing candlestick pattern

The bearish engulfing pattern is the opposite pattern and occurs after a rising trend. In this case the first candle is positive and its body is completely surrounded by the second negative candle, a sign of downward price pressure.


How to recognize high quality Bullish Engulfing setups?

Only focus on the very best setups when you want to start trading this pattern. When looking for such patterns, you should take into account the following elements that can significantly boost the success rate.

Minor Price Retracement

bullish engulfing pattern after minor price retracement



Since the engulfing pattern is a reversal pattern, it is important that the candles preceding the pattern decline, so that at least a small drop in price is observed. The pattern finalizes the price retracement.

Long term uptrend

bullish engulfing pattern in long term uptrend



Reversal candlestick patterns in falling trends whereby the long-term trend is still bullish offer the best opportunities. After all, in this way, you are trading in the direction of the existing long-term trend.

Volume

high volume during bullish engulfing pattern



Rising volume at the time the second candle forms is a plus, especially if volume was noticeably lower at the time of the price decline. The greater the volume, the greater the interest from buyers at this price level and the greater the chance that it will become a valid reversal pattern.

Earlier support level

bullish engulfing pattern on support



A candlestick pattern that coincides with a previously significant support level confirms its validity.

Closing price of the engulfing candle

bullish engulfing candlestick closing price



The engulfing candle should close at or near its highest price, which is a very strong signal of buying momentum. Long upper tails are to be avoided because this is a typical sign of selling pressure.

How to find tradable Bullish Engulfing candlestick patterns using the stock screener?


bullish engulfing pattern stock screener

In ChartMill it is possible to screen for bullish engulfing candlestick patterns. You can find these under the 'indicators' menu in the stock screener.

Keep in mind that ChartMill only identifies the patterns on the daily chart and that the results need to be checked manually according to the requirements listed above. Only in this way will you be able to select the most qualitative setups.

Find all Bullish Engulfing Patterns on the US markets today.

A few examples


bullish engulfing pattern trade example everi holdings

This chart shows the stock of Everi Holdings Inc. On the date of January 24, 2022, a Bullish Engulfing pattern is visible on the daily chart after a price decline where the price closed below the horizontal support level at $19 a day earlier.

The engulfing candle closes just below the high of day and thus regains the earlier support level. The volume is also noticeably higher than the earlier sell volume. The pattern was the beginning of a strong and fast price rise with a lot of momentum.

A second example can be seen on the daily chart of Fiserv Inc.

bullish engulfing pattern trade example fiserv

Again, a Bullish Engulfing candle is forming after the price has penetrated an earlier support level. The candlestick is enormous and pretty much closes on the high of day. The support level is thus regained and subsequently a price recovery is noticeable.


How to trade this pattern?


bullish engulfing pattern trading entry

Step 1: entering the market

Recognizing a good setup is not enough, you also need to know how you are going to trade the pattern and what the next steps will be once a position is opened.

In the example above bullish engulfing pattern is visible on the date of July 14 where at the same time a double bottom was formed (June 16, 2022). The engulfing candle closes on the high of day with strongly increased volume. Thus, the pattern meets several converging characteristics and is of sufficient quality.

For the next trading day a buy stop limit order is placed, a few cents above the high of the engulfing candle (in this article you can read why you should use this kind of order).

Step 2: Defining your stop loss

The initial stop loss can be placed either just below the engulfing candle or below the most recent swing low. In this case it doesn't matter because in this example the low of the engulfing candle is at the same time the most recent swing low.

Step 3: Managing your trade: defining breakeven and/or profit levels

First resistance is visible at the $72.5 price level, this represents the first price target. When the price reaches this level, you can choose to bring your stop loss to breakeven and perhaps sell part of the position. After a short period of consolidation the price goes further up and also the second target is reached where you can again sell a portion or the entire remaining part.

By focusing only on the best patterns and making sure that your average winners are larger than your loss positions, you will be able to trade this pattern consistently and profitably.

And remember…

bullish engulfing pattern failed trade example otis worldwide

No signal is 100% perfect, so even if you only withhold the best setups, you will face loss positions. In the same chart earlier on, there was also a bullish engulfing pattern that failed.

This pattern was of lower quality anyway, as there was still resistance slightly above the entry level. Initially the price did go up, but eventually you would have been stopped out a few days later. However, that loss was more than compensated by the second trade, where the second target had a risk/reward of more than 3.


Pros and cons when using Bullish Engulfing Patterns?


Pros Cons
It is easy to spot and can be used in multiple timeframes. (So suited for swing trading, day trading and position trading) Trading only the most qualitative engulfing patterns requires some experience.
Occurs frequently on the chart, so more than enough trading opportunities. Because the bullish engulfing pattern is frequent, the enticement to trade (too much) is considerable.
Decent risk/reward ratio due to short stoplosses. Short stoplosses will be hit faster, so it is important that winners are larger than the losers to compensate.

Summarized

  • Bullish Engulfing Patterns are reversal patterns which - when they occur at the end of a downtrend - can initiate the beginning of a new rising trend.

  • Because the second candle initially opens lower than the low of the first candle, but then rises and even closes above the opening price of that first candle, the so-called engulfing pattern is formed. This is a sign of strong upward momentum.

  • The quality of this bullish technical analysis pattern plays an important role for the success rate. Volume, momentum and other converging elements on the chart should reinforce the pattern before acting on it.