Bullish Engulfing Pattern
A Japanese Candlestick chart pattern that forms when a small black candlestick is followed by a large white candlestick that completely “engulfs” the previous period’s candlestick. The shadows or tails of the small candlestick may be short, which better enables the body of the engulfing candlestick to cover the entire candlestick from the previous period. This trend suggests that the bulls have taken control of price movement from the bears. This type of pattern usually accompanies a declining trend, suggesting that a reversal may be occurring. With Forex trading, gaps are rare from period to period, so the close of the first candlestick may equal the open of the second candlestick.
This has been proven to be a very high probability reversal signal over hundreds of years. We will break down the individual pieces of the bullish engulfing signal and show you how investor sentiment can cause a reversal.
The Bullish Engulfing pattern contains two opposite colored bodies and indicates a major reversal pattern. As you can see, the previous trend was downward.
The Bullish Engulfing Pattern opens equal to or lower than the previous candlestick’s close, but closes higher than the previous candlestick’s open. Notice how the Bullish Engulfing Signal completely “engulfs” the previous candlestick’s body. Ideally, the body of the 2nd Candlestick would completely engulf the entire range of the prior candlestick, shadows included.
Rules:
The body of the second day completely engulfs the body of the first day.
Previous candlesticks have been in a definitive downtrend, even if short term.
The first candle in this pattern is the same color as the previous trend (with the possible exception of being a DOJI or an extremely small body).
The second candle is the opposite color of the first (i.e. reversal of the trend)
Signal Strengtheners:
If the Engulfing Signal is a large body and engulfs a very small body from the previous day, it shows the trend was slowing. The large body Engulfing Signal indicates the new direction (reversal) has started with strength.
If the downtrend was fast and furious, when the reversal hits there will be less resistance to the move up, thus increasing the profit potential.
While you ignore the shadows for determining if the signal is indeed a Bullish Engulfing Signal, if the body of the engulfing signal completely encompasses the upper and lower shadows of the previous day, it shows extremely strong support for the reversal to continue.
The larger gap created between the open from the engulfing signal from the previous close, the greater the chance of a strong reversal.
The Bullish Engulfing Pattern is confirmed by a third white candlestick, with a higher close than the second day. This is the Three Outside Up signal.
General Analysis:
The market trend was on its way down. The price opens lower than where it closed the previous time frame. By the end of the time frame, the buyers have come out in force and moved the price above where it opened the day before. Suddenly investor sentiment sees the trend has been changed.
The Bullish Engulfing Pattern represents the reversal of the downward trend investor sentiment. Using this pattern as a buy signal is generally profitable because the Bullish Engulfing Pattern has signaled that the buyers are ready to buy.