The Engulfing Pattern
In a single candlestick pattern, a trader can spot a potential trading opportunity with just one candle. On the other hand, recognising multiple candlestick patterns requires at least two or occasionally three candles over multiple trading sessions in order to identify an opportunity.
The first multiple candlestick patterns we need to look at is the engulfing pattern. It takes two days of trading to form and is made up of a small candle on day 1 followed by a much longer candle that appears to swallow up the one from day 1. When it appears at the bottom of the trend, it is known as the Bullish Engulfing, and when found at the top it is known as the Bearish Engulfing.
The Bullish Engulfing Pattern
The bullish engulfing pattern is illustrated in the chart below and signals an upcoming trend reversal from bearish to bullish. This two-candlestick pattern is often seen at the end of a downtrend and serves as an indicator for traders to go long. In order for it to be reliable, the prerequisites must be met.
Here’s the thought process when we take into consideration bullish engulfing pattern:
The trade set up for the bullish engulfing pattern is as follows:
– A risk-taker starts the trade on P2 following confirmation that P2 is engulfing P1.
– The risk-averse trader enters the trade on the following day at the closing price, ensuring the day has formed a blue candle.
– The risk-averse trader would refrain from taking the trade if P2 is followed by a red candle, in accordance with the first principle of candlesticks (Buy strength; Sell weakness).
– On a personal level, when trading with multiple candlestick patterns that take several days to develop, it is beneficial to take risks rather than opting for a risk-averse approach.
It goes without saying that, when it comes to trading, you have to wait until either your set goal has been achieved or the stoploss limit is surpassed. Trailing the stop loss can also help secure gains.
Confusion often arises over whether the bullish engulfing pattern requires only the real body to be engulfed or the whole candle, inclusive of shadows. In my opinion, it is enough if only the real body is engulfed for a successful identification of this pattern. While purists might disagree, what matters most is that you sharpen your trading acumen with this type of candlestick.
Taking all that into consideration, I believe this pattern to be a bullish engulfing one, despite the fact that not all of the shadows are entirely engulfed.