What are Bullish Engulfing Candlestick Pattern?
Bullish Engulfing Pattern is a reversal candlestick pattern which is bullish in nature and appears at the end of a down trend. It is a complex pattern made of two candlelines. The first candle is bearish in nature and the second is bullish in nature.
It has its name because the real body of the second candle engulfs the real body of the first candlestick. It is one of the important pattern, which you should give attention to.
Bullish Engulfing Pattern is formed by the combination of two candlesticks. The first one is a falling black candle and the second is the reversal white candlestick.
The market is in a down trend. The price opens at almost high of the day and as usual the sellers continue to sell. At the end of the session the price closes almost at the bottom for the time period. This results in the formation of bearish black candle, which is the first candle of the Bullish Engulfing Pattern.
On the next day or next time period the price opens below the low of the real body of the previous bearish candlestick. Sellers are making new short trades. Those who are already short in the market are also adding to their position. But the smart money creeps in and starts accumulating shares from these ignorant sellers. As the demand increases the momentum decreases and the prices starts rising. As the prices rises the bears are happy to sell more at a higher price. This facilitates bulls to accumulate more shares at lower price.
The demand continues to increase more than the supply, pushing the price up. As the new short sellers are all in loss, they also start to buy back to minimize their losses. Sensing the change in the trend, the old bears starts booking profits in their short positions. As the bulls continue to increase their long position, the price rise further and at the end of the session the price closes above the real body of the previous candle. This results in the formation of bullish white candle, which is the second candle of the Bullish Engulfing Pattern and it engulfs the real body of the previous candlestick.
Bullish Engulfing Pattern is a major bullish reversal candlestick pattern. They occur at the bottom of a down trend.
For this to occur...
Study the chart given below.
It is obvious that the buyers are taking over the control of the market. It signifies that the bottom reversal of the down trend is unveiling.
Its importance increases...
It is a more powerful signal than Piercing Pattern because the action of bulls is more evident in Bullish Engulfing Pattern than in Piercing Pattern.
The significance of this Bullish Engulfing Pattern increases if the second day's opening is below a support area and the close is above the support area. If the second candle is a white marubozu or with a shaven head or shaven bottom, it speaks of the more bullishness of the market. Its importance is even more if it is accompanied by increased volume.
If you are holding a short position, Bullish Engulfing Pattern should alert you to take action the next day. One can cover her short position above the high of the second day's white candle.
A long trade can be entered above the high of the second day's white candle. Place a sell on stop order below the low of the pattern to limit your loss, in case the down trend continues to go down.
Sometime first day's real body can be white, if it is a very small body. First day can also be a doji.
Bullish Engulfing Candlestick Pattern may occur along a down trend without a reversal. It only exhibits a minor profit booking by bears.
Counter part of this pattern in a candle chart is Bearish Engulfing Pattern.
There are many more complex candlestick patterns used in stock analysis. Some of them are listed below. You may click on the name of each pattern listed below to learn and understand more about them.