what is a bullish engulfing candle pattern?
A bullish engulfing candle pattern can be identified when a small red candlestick which shows a bearish trend, is followed the next day by a large green candlestick, which shows a bullish trend, the body of which completely overlaps or engulfs the body of the previous day’s candlestick. This pattern usually tends to occur at the bottom of a downtrend and this indicates a surge in buying pressure.
Let’s see the explanation.
The smaller red candlestick is overshadowed by the larger green candlestick. This indicates the stock opened the second period lower than the previous close and tried to fall lower during the trading period. However, more buyers enter the market to buy the stock which raises the price sharply higher at the close and indicating bullish sentiment has taken over.
Characteristics of bullish engulfing candle pattern
- It is easy to identify such a pattern.
- The strong green candle engulfs the previous red candle body.
- It occurs at the bottom of a downward trend.
- The bullish engulfing candle pattern indicates a reversal of a downtrend and signals a rise in buying pressure when it appears at the bottom of a downtrend.
- Attractive entry levels can be obtained after receiving confirmation of the bullish reversal.
Below is an example of Bullish Engulfing pattern as shown in the daily chart of Axis Bank
One should remember the below points when trading with Bullish Engulfing pattern:
- Prior trend: One should note that the prior trend is the downtrend
- Pattern: The second candlestick should be bullish and engulfing the body of the first candlestick.
- Stop loss: Stop loss can be placed below the low where the bullish engulfing pattern occurs.
- Confirmation of the pattern: Also, don’t forget to confirm the signals given by this pattern with other technical indicators as we have to use the Relative Strength Index in our example.
Difference between Bullish Engulfing and Bearish Engulfing pattern
A bearish engulfing pattern is the opposite of its bullish counterpart, where prices are expected to decline, and bears dominate the market sentiment. Here a green or a white candlestick is engulfed by a red or black down candlestick on the following trading day, indicating that prices closed lower not just from the opening price of the second day but also gapped down from the opening of the previous day.