The bullish engulfing pattern is a chart pattern that forms when a new candlestick opens lower and then closes higher than the entire previous candle.
A look at the chart pattern will display the tails of the small candle stick as short. This allows the body of the larger candlestick to engulf the smaller black candlestick.
As a bullish reversal pattern, it works best when formed at the bottom of a down trend. According to market professionals, this pattern has been found to accompany a downtrend for an underlying security. This suggests that the end to the underlying asset is close.
The Bullish Engulfing pattern indicates a rise in buying interest which engulfs a range of the prior candlestick low surpassing candlestick highs. As a result, buying action will close at high with little or no upward change.
This has been found to move buyers onto the next candle and is typical to see a new trend form.
How the Bullish Engulfing pattern works
It is a common practice among professional traders to keep an eye on chart patterns. This enables one to identify an uptrend, a downtrend, volume breakouts, momentum and others.
In a Bullish Engulfing pattern, you will notice a small black candlestick covered by a larger candlestick.
The top of the small black candlestick body indicates the opening price while the bottom indicates the closing price of the security.
When it comes to the large candlestick, the top part of the body (open point) indicates the closing price and the highest price of the day while the bottom part (close point) indicates opening price and lowest price of the day.
Market professionals usually interpret this in the following way – the security opens during the second period lower than the previous close. As a result, investors and traders will start to display a buying interest.
If they begin to purchase the security, the price will be pushed higher at the close thus introducing a bullish trend.
How to trade with a Bullish Engulfing Pattern
When monitoring a trading chart, you may note a small bearish movement in price. This is followed by a Bullish Engulfing Pattern. What you need to know is that this is where the small red candlestick is overshadowed by the large green candlestick.
As a result, the pattern indicates a buying interest. If you were to enter the trade at a buying position especially at the open of the candle, you will end up making a sizeable profit.
By setting a stop loss at the Bullish Engulfing pattern candlestick bottom, the risk for this trade will be two times higher. Trading with this pattern has been found to be effective especially when it follows the sharp decline in price. This is attributed to market forces.
In case of a sharp incline or decline in market prices, investors and traders will lose faith in the market since it’s unable to maintain an incline or decline for a long period.
During trading, amateurs are known to chase price with the hope of profiting from its incline and decline. What you ought to know is that this is a mistake.
On the other hand, seasoned traders will enter the trade quickly or take their profits against the volatile price movement.
Bottom Line
It is important to know that this chart pattern helps to show a potential reversal which suggests that a security has attained its minimum value within a particular period.
As a result, it is common for the security to undergo a bullish movement. One of the best ways of identifying a Bullish Engulfing pattern is by using scanning software such as Trade Ideas to help spot them in real time.