Bullish Engulfing Candlestick Patterns Explained: What They Are & How To Trade Them

What Is a Bullish Engulfing Candlestick Pattern?

A bullish engulfing candlestick pattern is a 2-candlestick formation that may signal a bullish reversal.  It may appear during a downtrend and is made up of a bearish candle and a large bullish candle that opens below and closes above the first, fully containing the trading range of the first.

It is a subtype of the engulfing candlestick and the opposite of the bearish engulfing.  It can also act as a precursor to the three outside up pattern.  For all of these, the engulfing candle essentially functions as the potential break point of the prior trend.

Of course, no candlestick pattern guarantees a particular outcome.  Instead, they offer clues as to what is going on in the market.

So the question is, what does an engulfing candlestick really tell you?

What Bullish Engulfing Candlesticks Patterns Mean

Unlike the vast majority of candlestick patterns, the name describes it very well.

And unlike some, English speakers do not use the Japanese name.  It is named for the way the second candlestick seems to consume the first one (and perhaps the trend’s momentum along with it).

In trading terms:

• During the first period, price continued the pre-existing downtrend.
• The second period opens with a gap down that is quickly filled as price proceeds to move back up above the opening price of the previous period.

This sets the stage for bullish reversal, as selling pressure is beginning to bubble over.

How To Recognize Bullish Engulfing Candlestick Patterns

Traders are attracted to patterns partly because they are easy to spot.

However, it’s also easy to see things on the charts that aren’t truly there (or anticipate events that never come to fruition).  That’s one of the reasons why waiting for confirmation is so important.

Technically, a bullish engulfing candle pattern must:

• Appear during a downtrend
• Begin with a bearish candle
• End with a bullish long candle
• Have the first candle’s body contained completely within the body of the second

In practicality though, many traders will make various exceptions.

• The first candle can be a neutral candle (ie. a doji), as long as it is fully contained within the body of the second.
• The first candle can move against trend, as long as it is fully contained within the body of the second.
• The second candle doesn’t necessarily have to be a long candle, as long as it fully contains the body and wicks of the first.
• The open of the second candle can be even with the close of the first candle, especially in markets where gaps are less common like cryptocurrency.

Depending on who you ask, any of these standards may be more or less important.  Moreover, some of these variations may be more properly classified as other reversal candlestick patterns.

Remember, identifying the reversal itself is more important than labeling the formation.  That’s not to say these standards are completely unimportant (as we’ll touch on shortly).  It’s just to say that the implications are more important than the criteria.

In other words, you need to put it into context.

Where Bullish Engulfing Candlesticks Fit in the Chart Narrative

The markets are often characterized as a battle between the bulls and the bears.

Bullish engulfing candlestick patterns show that the bears attempted to press their advantage on candle one, continued to do so between candles one and two, but then completely lost the momentum by the end of candle two.

On the chart, it looks like the dam broke.

It might happen like this on a daily time frame:

On the first day, the bears continued the downtrend.  After the market closed for the day, price continued to drift downward.  This created a modest gap down open on the next day.  However, once trading began on the second day price immediately moved higher and continued throughout the day, eventually closing above the open of the previous day.

From here, the bulls look to push even higher as the bears become more hesitant.

In the short-term, it amounts to a bullish counterpunch.

The question traders need to ask themselves is, “Will this lead to sustained reversal or will it turn out to be a bull trap?”

To answer that question, you’ll need more than just an understanding of Japanese candlesticks and candlestick patterns.  You’ll want to analyze both within the context of greater chart patterns as well as trend and price levels.  You’ll also want to make use of your own chart markup and indicators.

Analyze the history of your preferred asset(s) with respect to bullish engulfing candlestick patterns and apply it to your own trading style.

Now, you can test (and/or stretch) the criteria we mentioned above to find the most tradeable opportunities.  For example, you may find that engulfing candlesticks whose second candle encompasses the body and wicks play out more reliably than those that only encompass the body.  Or, you may find the opposite.

Here is where the story in the charts begins to come into focus.

This is what we call technical analysis.

How To Trade Bullish Engulfing Candlesticks Patterns

Bullish reversal points are great places to enter longs or exit shorts.

Bullish engulfing candlestick patterns serve as easy-to-spot signs of potential bullish reversals—and may even lead to longer-term bottoms when found on higher time frames.

Generally, you can put more weight into multi-stick patterns than single candles.  They give you more information over a longer amount of time.  Still, it is considered unwise to trade based on candlestick patterns alone.  They rarely have extremely high hit rates by themselves.

You need additional points of confluence to shift the probabilities in your favor.

Some of the more important ones include:

• Volume – Reversals are often accompanied by elevated trading volume.  For bullish engulfing candles, be on the lookout for it on the second candlestick (or shortly thereafter).
• Price Formations – Bullish engulfing candlesticks that form near important support levels are usually more likely to lead to sustained reversals.  They may also reinforce the strength of such levels.
• Oscillator Shift – Oscillating indicators like the RSI or stochastics are commonly used to identify reversals by analyzing slope, percentile, and/or divergence.

The fewer such factors corroborating the reversal, the less confident you can be about it.

It would be difficult to form a comprehensive trading strategy around engulfing candlestick patterns (whether bullish or bearish).  There simply isn’t enough there to develop a strong edge.  Even with a great understanding of trading math, orders, psychology, risk management, options, and automation, you’d still have a hard time.

You’re much better off building your strategy around other tools then using reversal patterns as an additional point of confirmation.

Patterns like the engulfing are much better idea givers than trade makers.

Other Candlestick Pattern Types

The bullish engulfing is but one of many candlestick patterns.

You’d be wise to get familiar with all of the other ones too.

• Abandoned Baby – Bearish | Bullish
• Breakaway – Bearish | Bullish
• Counterattack Lines – Bearish | Bullish
• Doji Star – Evening | Morning
• Harami – Bearish | Bullish
• Harami Cross – Bearish | Bullish
• In Neck – Bearish | Bullish
• Kicking – Down | Up
• Ladder – Top | Bottom
• Last Engulfing – Top | Bottom
• Mat Hold – Bearish | Bullish
• Matching – High | Low
• Meeting Lines – Bearish | Bullish
• On Neck – Bearish | Bullish
• Separating Lines – Bearish | Bullish
• Star – Evening | Morning
• Stomach – Below | Above
• Tasuki Gap – Downside | Upside
• Three Inside – Down | Up
• Three Methods – Falling | Rising
• Three Outside – Down | Up
• Three-Line Strike – Bearish | Bullish
• Tri-Star – Bearish | Bullish
• Tweezer – Top | Bottom
• Window – Falling | Rising

Sure, there are quite a few of them.  But don’t let that intimidate you.

It’s unnecessary to memorize all the names and criteria for every pattern.  What’s more important is to learn the principles of price action and technical analysis.

In fact, you’re free to forget all of the names and specifications as long as you can look at a group of candlesticks and understand what they are trying to tell you.

Takeaways

To review:

Bullish engulfing candlesticks are a type of candlestick pattern that signals a potential bullish reversal.  While not a guarantee, their appearance may indicate that market conditions are changing.  Thus, they can help you find winning trades.

Of course, there are other candlestick patterns that you should learn about.  And even so, the ability to recognize patterns is not enough to trade successfully on its own.

Nonetheless, you’ve now added one more tool to your toolkit.

Have questions or more information to add?  Contribute to the conversation in the comments below!  Or, if you know someone who could benefit from this post, share it with them.  You can also check out our Candlestick Patterns Guide to improve your candlestick analysis skills.