Bullish Engulfing Pattern Trading Strategy Guide:
Bullish Engulfing Pattern (Candlestick Formation)
- For a bullish engulfing pattern formation, the bullish sentiment of the current day completely overcomes the bearish sentiment of the prior day.
- The bullish engulfing candle is a reversal pattern that confirms the dominance of the buyer over the seller and indicates a potential reversal in the trend direction.
- It is a two- candlestick pattern.
- The 1st candles signify that the seller has the upper hand during the whole trading day, and pushes the price lower.
- And the 2nd candles signify that the buyer has completely dominated the seller of the previous day and pushes the price higher.
- For a genuine trend reversal set up the volume in the 2nd bullish candle must be very high, indicating significant buying in the stock.
What is inside a Bullish Engulfing Pattern, how it form?
- Inside of bullish candle in lower time frame:
- Day 1 is the 1st-day candle, which was a big bearish candle in a daily time frame.
- The whole day seller has pushed the price down.
- Seller volume dominated the buyer volume
- Only 2 bullish candles volume is above the 50 period average of volume.
- Day 2 is the 2nd-day candle, which was a big bullish candle in a daily time frame.
- The whole day buyer has pushed the price up.
- Buyers volume dominated the sellers volume
- Here 7 bullish candles volume is above the 50 period average of volume indicating the participant of a major player in the up move.
- Bullish engulfing candle in a higher time frame:
- In a higher time frame, two candles of daily period form hammer in a higher degree time frame of 2 days.
- Hammer is a very powerful candle indicating the rejection of price, and dominant of the buyer.
What does a bullish candle represent?
- The bullish engulfing candle gives a strong signal when showing up at the bottom of a downtrend and demonstrates an increase in purchasing pressure.
- Bullish engulfing often results in a reversal in trend, as move buyer enters the market and pushes the price higher.
- Bullish engulfing candle confirms with the increase in the volume provide an initial base for future uptrend movement.
- If a bullish engulfing candle forming near a support or at some technical level of indicator, the possibility in trend reversal further increases.
Engulfing candles multiple uses?
Engulfing candles can help you to identify a possible trend reversal, indicate the strength of the move, and also help is identifying exit points.
Spotting reversal, as you all know market moves in trend, in an up-trending majority of trader will seek to buy at a pullback, but no one know at which level will the pullback will end, so by spotting engulfing candle in a pullback we can time the market at a possible reversal level.
- Trend continuation:
A trader can look at the bullish engulfing candle during an uptrend, which provides more conviction that the uptrend is likely to continue.
- Exit system:
The bullish engulfing candle can be used as a signal to exit a short trade. If you are holding a short position and after a fall in the market you see a bullish engulfing pattern it is better to book profit.
1. How to Trade a Pullback?
- Here bullish engulfing candle forms at point O and point B
- Entering at point O is not favorable, as share was is in a downtrend and has no prior support below.
- After share has moved from O to A, then pullback came at point B
- Formation of bullish engulfing at above 50 MA is a confirmation 50 MA is acting as support.
- After which we can enter into a trade.
- Keeping stop loss below the low of point B
2. How to Catch the Market Bottom?
- There are several price action patterns like head & shoulder, wedge, triangle, double bottom, and many more.
- Here we have discussing double bottom pattern, in this pattern as shown in the image above the period leg acting as a support.
- And the formation of the bullish engulfing pattern at such an important level, we give us good trading opportunities.
- This is a chart of nifty of December 2017, after this bullish engulfing pattern market started its new uptrend.
3. How not to trade a bullish engulfing candle?
- If the market is in a genuine downtrend, and there is no prior support level available for the price then blindly looking at a bullish engulfing pattern is a mistake.
- If an overall trend is down, it is because of players of the market are betting against the share.
- Big players cause heavy selling pressure with high volume.
- If you are buying share after a bullish engulfing candle occurs under such condition, it will result in a loss.
- Just think how a one-day bullish candle can overcome such a heavy downtrend.
- You can’t make money betting against the big player in the market.
- Well, there are cases when prices do tend to reverse sharply, after the formation of bullish engulfing candle even in a downtrend but there probability of success is very less.
- As a novice trader is it better to look for a high probability setup.
Mistakes to avoid while trading bullish engulfing
- Trading bullish engulfing signal without understanding the different market condition will cost you.
- If you are using a bullish engulfing signal for entry without using any other confirmation signal, then you haven’t understood the market behavior otherwise you won’t do such a silly mistake.
- What seems to be a bullish engulfing candle in a higher time frame will just be a retracement of the previous downtrend after which the trend will continue in its original path.
- If you are only focused on price without realizing the importance of volume in bullish engulfing candle then you wouldn’t be able to identify a fake bullish engulfing candle and fall into a trap.
- To be a valid candle, the 2nd-day bullish candle must completely engulf previous day candle range
- We can time the market better as Engulfing candle provide us good opportunities to time the market, and enter before momentum started.
- Only higher time frame candlestick patter should be considered like daily or weekly, lower time frame candela are more susceptible to noise
- To be called a valid engulfing candle it must form after a downtrend having an exhausting volume.
- Engulfing candle must break the eminent resistance zone with high volume, otherwise is not considered a valid signal
- 50% retracement of the engulfing will provide us higher risk-reward opportunities.
How to enter at 50% retracement of the engulfing candle?
- First let a bullish engulfing candle for after a downtrend
- Here day 1st bearish candle looks like a hammer,
- Day 2nd bullish candle completely engulf the prior day candle, so it is a valid engulfing pattern
- Draw a Fibonacci level from LOW to HIGH of the bullish candle.
- If the price came near this 50% level in the upcoming day, it will provide us a low-risk entry.
- We can keep stop loss a few points below, the lowest low of the two-day candle.
- Engulfing candle won’t occur after every pullback, which means you are gonna miss lot of trading opportunities to overcome this you can use engulfing of multiple candles example after a pullback in an up-trending market, take multiple candles to engulf period candle
- An engulfing candle will not always signal a trend reversal that is why we should always use stop loss.
- The engulfing candle can occur in a downtrend, and any up move may turn out to be a retracement of the current trend, rather than a trend reversal.
- If you are directly applying the rules of engulfing candles in a shorter time frame your stop-loss is likely gonna hit. Candles forming in higher time are more reliable.
In this blog we have discussed the bullish engulfing candle formation, what kind of market sentiment does it represent where to look for a bullish candle, precaution to be used, does, and don’t regarding the application of the bullish candle. It is an easy concept for a beginner to understand. After understanding the basics of different candles and the reason behind their formation then only you can read and understand the chart of any share.
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