The bullish engulfing pattern is considered one of the most popular and powerful reversal patterns in the world of Japanese candlesticks. It is widely used by traders to identify bullish reversal points and enter precise buy trades. However, despite its popularity, many traders misidentify this pattern because it has specific conditions that must be met in order to be relied upon confidently within any technical analysis.
Pattern Definition
The bullish engulfing pattern is a bullish reversal pattern that usually forms at the end of a downtrend, signaling a potential shift in direction from bearish to bullish. This pattern reflects the strength of buyers and their dominance over sellers after a prolonged period of decline. It often appears at strong support levels, which are areas where buyers are heavily concentrated.
It consists of two main candlesticks:
• The first candlestick is bearish (red), representing the final stage of sellers’ dominance.
• The second candlestick is bullish (green) and is called the engulfing candle, as it completely engulfs the body of the previous candle.
This means that its opening is equal to or lower than the close of the first candle, while its closing is higher than the opening of the first candle, clearly indicating a complete shift of control to the buyers.
When analyzing the pattern, no importance is given to the upper or lower wicks (shadows), as the main focus is on the bodies of the two candles only, since the opening and closing prices best reflect the true market momentum.
Where does the pattern appear?
The bullish engulfing pattern appears at the end of downtrends, often at strong support levels or along ascending trendlines.
The presence of this pattern in such areas is considered a strong indication that the market is preparing for a reversal, especially if it coincides with high trading volume or other confirmation signals such as a break of a minor resistance level or divergence in momentum indicators.
The psychology behind its formation
To understand this pattern deeply, we need to look at what is happening psychologically between buyers and sellers during its formation. In a downtrend, sellers have full control, and consecutive red candles reflect continuous selling pressure.
Then the bullish engulfing candle appears as a strong reaction from buyers who enter aggressively from support levels.
This candle completely engulfs the body of the previous bearish candle, meaning that buyers not only managed to stop the decline but also fully reversed the direction in their favor.
This sudden move causes a major psychological shift in the market, as traders who were selling begin to close their positions or start buying to avoid larger losses, which strengthens bullish momentum and confirms the reversal.
How to trade using the pattern
When the bullish engulfing pattern appears at a clear support level or along an ascending trendline, it is considered a strong signal to enter a buy trade.
The trading steps are as follows:
- Wait for the bullish engulfing candle to fully form and close to confirm the validity of the pattern.
- Enter a buy position immediately after the candle closes.
- Place the stop loss a few points below the low of the pattern to avoid the lower wick.
- Set the profit target at least three times the value of the stop loss.
In the practical example, the pattern forms on an ascending trendline, which is considered a dynamic support level that enhances the chances of a price rebound. After the bullish engulfing candle is formed, price moves strongly upward and reaches the targets with ease, confirming the effectiveness of the pattern when it appears under the correct conditions.
Important Notes
• It is preferable to use the pattern alongside other confirmation tools such as momentum indicators or trading volume.
• The pattern should not be relied upon in random areas of the chart without the presence of a clear support level.
• The larger the body of the second candle and the more it engulfs the first candle, the stronger the signal becomes.
In summary, the bullish engulfing pattern represents a clear psychological and price reversal, expressing the moment when control shifts from sellers to buyers. It provides a strong buying opportunity when it appears in the right location, and adhering to its conditions is what makes it a precise and effective tool in technical analysis
