Bullish Engulfing Candlestick: How to trade, Works, Psychology and 10 Tips

So, I have already covered most candlestick patterns, and now I am going to explain the Bullish Engulfing Candlestick. To understand it thoroughly, make sure to read the entire article. I will cover what this candlestick pattern is, the psychology behind it, how to trade using it, and its accuracy rate.

What Is a Bullish Engulfing Pattern?

An Engulfing Candlestick is a pattern where the current candlestick completely engulfs the previous one, covering its entire body. So here we are learning about bullish engulfing candlestick pattern lets understand it.

A Bullish Engulfing Candlestick is a two-candlestick pattern that typically appears after a downtrend. In this pattern, the second candlestick is a large green (bullish) candle that completely engulfs the first smaller red (bearish) candle. This indicates that buyers have gained control, and the market sentiment may shift from bearish to bullish.

How It Works:

1. First Candle (Bearish):
   • The market is in a downtrend, and the first candle is red, showing that sellers are still in control.
2. Second Candle (Bullish):
   • A large green candle opens lower than the first candle’s close but closes much higher, completely covering the first candle’s body.
   • This shows that buyers (bulls) have stepped in and overpowered the sellers (bears).

Key Takeaways:

• It’s a reversal pattern that signals a possible upward movement in the market.
• More reliable when formed at a strong support level or after a prolonged downtrend.
• Works best with confirmation, such as increased trading volume or follow-up bullish candles.

This pattern tells us that the sentiment has shifted from negative (selling pressure) to positive (buying interest). It’s often used by traders to enter long (buy) positions.

Also Read: Hammer Candlestick Pattern A Strong Bullish Reversal

Why Bullish Engulfing Forms?

The Bullish Engulfing Candlestick forms due to a shift in market sentiment, where buyers overpower sellers, signaling a potential trend reversal. Here’s why it happens:

1. Sellers Losing Strength:

• Before the pattern forms, the market is usually in a downtrend, driven by selling pressure.
• However, as the price falls to a significant support level, sellers begin to lose momentum because many have already exited their positions, or the price is too low to attract new sellers.

2. Buyers Step In:

• At lower prices, buyers see an opportunity and start accumulating.
• This buying pressure creates a large bullish (green) candle that fully engulfs the previous bearish (red) candle.

3. Market Psychology:

• The small bearish candle shows hesitation among sellers.
• The strong bullish candle reflects confidence among buyers, signaling that the market sentiment has shifted from bearish to bullish.
• Traders interpret this as a sign of potential reversal and may enter long positions, further fueling the upward momentum.

Key Factors Leading to Its Formation:

• Support Levels: Often forms near strong support zones.
• Oversold Conditions: Indicates that the asset might have been oversold, and buyers are ready to take over.
• Market News or Events: Positive news can trigger sudden buying, leading to the formation of this pattern.

The Bullish Engulfing Pattern essentially represents a battle between buyers and sellers, with buyers ultimately gaining control.

Also Read: Doji: The Market Changer Candlestick

What is the Psychology Behind Bullish Engulfing Candlestick?

Understanding the psychology behind any candlestick is crucial because if you trade without grasping it, you might make a profit once or twice, but in the long term, you’ll end up in losses. That’s why it’s essential to understand the psychology of a Bullish Engulfing Candlestick.

The Bullish Engulfing Candlestick tells a story of a battle between buyers (bulls) and sellers (bears), where the buyers ultimately gain control. To trade effectively, understanding this psychology is critical. Let’s break it down step by step:

1. The Context: A Downtrend

Before a bullish engulfing forms, the market is typically in a downtrend. Sellers dominate, and prices continue to fall as the sentiment is negative. Traders are bearish, expecting further declines.

• Market Sentiment: Fear and pessimism are high. Most participants are looking to sell or are waiting for lower prices to buy.

2. The First Candle: Bears in Control

The first candle of the pattern is bearish (red), showing that sellers still have the upper hand. However, this candle may have a smaller body, indicating that selling momentum is weakening.

• Psychology of Bears: Sellers believe they are still in control, but their confidence is not as strong as before.
• Psychology of Bulls: Buyers are observing the situation, waiting for the right moment to act.

3. The Second Candle: Bulls Strike Back

The second candle opens lower than the first (creating a gap down in some cases), which initially reinforces the bearish sentiment. But soon, buyers step in aggressively, driving the price higher.

• The green candle closes significantly higher, completely engulfing the previous red candle.
• This shift reflects a sudden and strong reversal in sentiment.

Why This Happens:

• Support Zone: The price may have reached a strong support level, attracting buyers.
• Oversold Conditions: Sellers may have exhausted their momentum after a prolonged downtrend.
• New Buyers Enter: At lower prices, long-term buyers see value and enter the market.

4. The Signal: Bulls Take Control

By the end of the second candle, the message is clear: buyers are now in control. The large green candle shows strong bullish momentum, indicating a potential trend reversal.

• Bears’ Psychology: Sellers start to panic, realizing they might be wrong. Many begin covering their short positions, further driving the price up.
• Bulls’ Psychology: Confidence grows as buyers see the opportunity for an uptrend, encouraging more participation.

5. Lessons for Traders

• Without Understanding Psychology: If you trade solely based on the pattern without grasping the underlying dynamics, your decisions may lack conviction.
• With Psychology: Understanding why the pattern forms helps you identify reliable setups and avoid false signals, ensuring consistent profits over the long term.

Key Takeaway

The Bullish Engulfing Pattern is not just two candlesticks on a chart—it’s the story of a market shift from pessimism to optimism. By understanding this psychology, you can trade with greater confidence, knowing that you’re aligning yourself with the prevailing market sentiment.

Also Read: Mastering Psychology in the Game of Trading

How to Trade Bullish Engulfing Candlestick?

To trade with a bullish engulfing, you need to understand its psychology, which you have already grasped. Now, look at how to take a trade based on this pattern.

trading the Bullish Engulfing Candlestick pattern, breaking it down step by step with more detail.

1. Understanding the Bullish Engulfing Pattern:

• What it is: A Bullish Engulfing pattern consists of two candlesticks:
  • The first is a small red (bearish) candlestick, showing that the price moved down.
  • The second is a large green (bullish) candlestick, which completely engulfs the body of the previous red candlestick. This indicates that buyers have taken control and pushed the price higher.
• Psychology: The pattern suggests that after a period of selling pressure, buyers have overwhelmed the sellers, and the market could start an uptrend.

2. Where to Look for a Bullish Engulfing:

• Key Locations: The best places to spot this pattern are:
  • At Support Zones: A strong support level is where the price has historically bounced up before. When a bullish engulfing forms here, it increases the chance of a reversal.
  • After a Downtrend: The pattern is most reliable when it appears after a price decline. It signals that the downtrend may be reversing.
  • Near Trendlines: If the price reaches a trendline after a decline and forms a bullish engulfing, it gives a stronger indication of a reversal.

3. Confirm the Pattern:

• Volume Confirmation: A higher volume on the second (bullish) candle adds more credibility to the reversal. It suggests strong buying pressure.
• Check for Previous Resistance or Trend: If there’s resistance near the level of the bullish engulfing, it might indicate a breakout from that level. If not, consider the pattern as a potential reversal.

4. Entry Point:

• When to Enter: Enter your trade after the second (bullish) candlestick closes. This ensures that the pattern is confirmed and that the buying pressure is real.
• Waiting for Pullbacks (Optional): Some traders prefer to wait for a small pullback after the bullish engulfing pattern forms to ensure the trend is truly reversing. This can help you get in at a better price.

5. Stop Loss:

• Where to Set It: Place your stop loss just below the low of the bullish engulfing candle. This way, if the price reverses and goes against you, your loss is minimized.
  • Example: If the low of the bullish engulfing candlestick is 100, you can set the stop loss at 98 or 99.
• Why it Works: A stop loss at this level protects you from larger losses if the pattern fails and the price continues to move lower.

6. Profit Target:

• Determine the Target: You can set your profit target at:
  • Previous Resistance Levels: Look for the next resistance level where the price could potentially face selling pressure again.
  • Risk-to-Reward Ratio: Many traders use a 1:2 risk-to-reward ratio, meaning if your stop loss is 2 points away, aim to take profit 4 points higher. This ensures you’re making more than you’re risking.
• Trailing Stop (Optional): If the trend is strong and you see the price moving in your favor, you can move your stop loss to break-even or lock in profits as the price continues to rise.

7. Additional Confirmation Signals:

• Check the RSI (Relative Strength Index): If the RSI is below 30 (indicating the stock is oversold) and a bullish engulfing appears, it adds more weight to the likelihood of a reversal.

• MACD Indicator: The MACD can also help confirm the trade. A crossover of the MACD line above the signal line after the bullish engulfing can suggest stronger momentum.

8. Managing the Trade:

• Keep an Eye on Market Conditions: Even with a strong bullish pattern, external factors such as overall market sentiment or news can affect the trade. Keep an eye on the broader market to avoid sudden reversals.
• Exit Strategy: If the price reaches your target or shows signs of weakening (like a small bearish candlestick forming after a strong rally), consider exiting the trade early to lock in profits.

Example Trade:

1. Find the Bullish Engulfing: You notice a bullish engulfing candlestick at a key support level after a downtrend.
2. Wait for Confirmation: The next candlestick closes strong (green), confirming the buying pressure.
3. Enter the Trade: You enter a buy trade after the second candlestick closes.
4. Set Stop Loss: Place the stop loss just below the low of the bullish engulfing candle.
5. Target the Resistance: Set your target at the nearest resistance level, or use a risk-to-reward ratio.
6. Monitor the Trade: Track price action and adjust the stop loss or take profits as needed.

A bullish engulfing is a powerful candlestick pattern that signals a potential reversal from a downtrend to an uptrend. By understanding where to look for the pattern, confirming it with volume, and applying a well-thought-out entry, stop loss, and target strategy, you can trade this pattern effectively.

What is the Risk Reward Ratio in this Candlestick?

A Bullish Engulfing Candlestick is a powerful reversal pattern that can yield excellent risk-reward ratios, depending on how and where it forms. Let’s analyze its potential for intraday and swing trading, showing how a 1:30 risk-reward ratio is achievable under the right conditions.

In Intraday Trading

For intraday traders, the focus is on smaller timeframes (e.g., 5-min, 15-min charts):

1. Setup: Look for a bullish engulfing pattern forming near an intraday support level, such as VWAP, pivot points, or a moving average.
2. Stop-Loss: Place the stop-loss just below the low of the engulfing candle. The tight stop ensures minimal risk.
3. Target: Aim for the nearest resistance or calculate a predefined multiple of the risk (e.g., 1:3 or 1:5).

Example:

• Entry: At the close of the engulfing candle (₹100).
• Stop-Loss: Below the low of the candle (₹98).
• Target: ₹106 (for a 1:3) or ₹110 (for a 1:5).

With proper confirmation (like higher volume), even intraday setups can lead to significant returns while keeping risks low.

In Swing Trading

For swing traders, larger timeframes (e.g., daily or 4-hour charts) offer even greater opportunities:

1. Setup: Identify a bullish engulfing candlestick forming at a major support level, such as a trendline, Fibonacci retracement, or moving average.
2. Stop-Loss: Place the stop-loss just below the engulfing candle’s low, which often aligns with the support.
3. Target: Use a larger resistance level or a risk-reward ratio of 1:10, 1:20, or even 1:30 in strong trends.

Example:

• Entry: At the close of the engulfing candle (₹200).
• Stop-Loss: Below the low of the candle (₹195).
• Target: ₹230 (1:6), ₹260 (1:12), or even ₹350 (1:30 in a strong uptrend).

How 1:30 Risk-Reward is Possible

A 1:30 risk-reward ratio is rare but achievable when:

1. The bullish engulfing occurs at a critical level (e.g., multi-month support or after a steep sell-off).
2. The overall market trend supports the reversal.
3. You ride the trade for a longer duration in swing trading, letting the trend run while using trailing stop-losses to protect profits.

This all depends on where and on which timeframe a person is trading. If someone is trading on a 15-minute timeframe, they will mostly work with candlesticks from that timeframe rather than 1-minute or 3-minute candlesticks. Similarly, backtesting is just as important.

10 Tips for Trading with Bullish Engulfing Candlestick

1. Understand the Pattern

• A bullish engulfing pattern consists of a small bearish candle followed by a larger bullish candle that completely engulfs the previous candle’s body. Ensure you can identify it clearly on the chart.

2. Confirm the Trend

• Look for this pattern at the end of a downtrend or a pullback in an uptrend. It’s most effective as a reversal signal in such scenarios.

3. Volume Matters

• High trading volume on the bullish engulfing day strengthens the pattern’s validity, as it shows strong buying interest.

4. Combine with Support Levels

• The pattern is more reliable when it appears near a key support level or a previous swing low.

5. Use Indicators for Confirmation

• Combine the pattern with indicators like RSI (oversold zone) or MACD (bullish crossover) to enhance accuracy.

6. Avoid Trading in Isolation

• Do not rely on the pattern alone. Use other tools like trendlines, moving averages, or Fibonacci retracements for additional confirmation.

7. Set a Proper Entry Point

• Enter a trade after the bullish candle closes to confirm the pattern, or consider entering on a pullback near the midpoint of the engulfing candle.

8. Define Stop-Loss Strategically

• Place your stop-loss just below the low of the bullish engulfing pattern to manage risk effectively.

9. Watch for Resistance Zones

• If the pattern forms near a resistance zone, the upward move may be limited. Avoid aggressive entries in such cases.

10. Practice Patience

• Wait for proper confirmation before entering trades. Hasty decisions based on incomplete patterns can lead to losses.

By combining these tips with disciplined trading, you’ll increase your chances of leveraging the bullish engulfing pattern effectively.

Conclusion on Bullish Engulfing Candlestick

A bullish engulfing candlestick pattern is a bullish reversal candlestick. It forms when sellers have pushed the market down, and then a candlestick appears that completely engulfs the previous red candlestick, creating the bullish engulfing candlestick.

In this entire article, we learned about the Bullish Engulfing Candlestick, covering where it forms, the psychology behind the candlestick, how to trade it, and what the reward ratio is. If anyone wants to update anything in the article, please contact Street Investment. Additionally, if you need any help related to trading, feel free to reach out to them as well.

Happy trading journey to all traders!