The bullish engulfing is a two candle pattern, in which the black candle’s body of the first line is engulfed or covered by the white candle’s body of the second line. The first line can be any black basic candle, appearing both as a long or a short line. It can even be a doji (except for the four price doji). You can read more about what engulfing means here.
What happens when a bullsih engulfing pattern forms?
The signal day opens lower than the preceding day’s close. Then it trades higher, so by the end of the day it will close above the previous days open. This shows a change in sentiment, from a gap down in the morning to a strong price escalation during the day that forms a large bullish candle. The bulls are in control and it seems that a reversal is on the horizon.
The engulfing candlestick patterns – both bullish and bearish engulfing – are one of the easiest to identify.
How to trade the bullish engulfing?
It’s a bullish reversal pattern, so you would want to enter long in the first place. Other than that it makes sense to place your stop a few pips below the bottom of the pattern. This means the lowest point of either of the two candles. As the second candle is typically a long one, no need to wait for further confirmation candles. You can enter right at the open of the next bar.
Going long at all time highs is probably not the best idea, it makes sense to look for bullish engulfing in a pullback if you are in an established trend. A combination of a strong trend, a pullback and some kind of support level is usually a powerful setup.
If you have a strong conviction that the downtrend is close to it’s ending, you can trade this pattern, but refrain from entering long if no other signs show that the downward pressure is over. You can look for fundamental information or different hints on the chart to reinforce your decision. These would entail divergence between indicators and price, strong support lines or and the appearance of other reversal candles. A strong setup is a combination of several of the above.
A strong support under the pattern reinforces the price move, just make sure that the pattern closes above the support level. In case it does not, you had better wait for a candle that closes above the support line.
Entering long right under resistance is usually not a great idea, regardless of the pattern. However if you see that the resistance was penetrated, the price pulls back to it and the pattern forms, that’s a strong sign. In this case your resistance level is already a support.
How reliable is the bullish engulfing?
As you encounter this pattern quite often it makes sense to believe that the bullish engulfing is not super reliable. As a matter of fact we gave it a score of 4 out of 4 meaning it is among the weakest patterns. In itself it’s not strong enough to rely on. Always look for further confirmations as discussed above and this way you can trade it carefully.
Bullish engulfing for stocks
The bullish engulfing can be traded for stocks, if the volume is large enough. Usually makes sense to use a daily timeframe or larger and look for further confirmaions. You can ignore this signal for illiquid stocks, where trading volume is low.
Bullish engulfing for forex
Longer timeframes are more reliable, in forex you can more or less ignore this pattern on minute based charts. But it does not make sense to trade it without combining other signals at all on any timeframe.
Bullish engulfing for Bitcoin
In itself you should not trade this pattern even for Bitcoin. Use other signals, such as support levels, too. Choose larger timeframes and avoid too small candles.
In summary we can say that probably the best setup is in an uptrend when you see a pullback to support. You can look for other bullish reversal candles for confirmation. The opposite pair of the bullish engulfing is of course the bearish engulfing pattern.