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