Engulfing Patterns and Bullish Engulfing Signals Unlock Trading Opportunities

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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.

  1. A downward trend should be the norm.
  1. On the first day of P1, a red candle should be present to reaffirm the bearish direction in the market.
  1. For P2, select a blue candle that is long enough to completely cover the red one.

Here’s the thought process when we take into consideration bullish engulfing pattern: 

  1. The market is declining, with prices gradually decreasing.
  1. Initially, on P1, the market opens at a low and drops further, resulting in a red candle.
  1. On the second day of the pattern (P2), the stock starts close to the closing prices from P1 and strives to hit a new low. Nonetheless, buying activity is seen at this point which pushes the costs up and causes it to finish higher than what it opened with the day before. This creates a blue candle.
  1. The price action on P2 indicates that bulls had a sudden and successful attempt to overcome the bearish trend, as evidenced by the long blue candle.
  1. The bears were taken aback by the bull’s unexpected move on P2, leaving them feeling somewhat uneasy.
  1. It appears that prices will remain high over the coming trading sessions and traders should take advantage of this by searching for buying opportunities.

The trade set up for the bullish engulfing pattern is as follows:

  1. The bullish engulfing pattern develops over two days.
  1. The recommended purchase cost is near the P2 closing rate of the blue candle.

– 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.

  1. The trade stop loss should be at the bottom low in the range between P1 and P2.

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.

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