Bullish Engulfing Candlestick Trading Tutorial and Example
The bullish engulfing candlestick pattern is a regularly occurring pattern on the price charts of stocks, ETFs and stock market indexes. Its formation represents a potential reversal of the ongoing downward trend in the prices of the security. For instance, if the bullish engulfing is formed when the price is in downtrend, then the price may start to move up after the formation of bullish engulfing. Being a two-line pattern, one must look for the formation over two periods of the candlesticks. The bullish engulfing represents a state of possible reversal.
Formation of the bullish engulfing candlestick is very common in the market. It is also considered a strong signal, which has a good rate of success if followed properly. To understand the working of bullish engulfing candlestick, let's get into the details of its formation.
Construction of the Bullish Engulfing CandlestickThe bullish engulfing candlestick is formed by two adjacent candles. The first candle is a bearish candle which is in the downtrend, and has its close price lower than the open price. This first candle can even be any doji candle which has zero or very little body length.
The second candle that follows, which is actually known as the engulfing candle, is a green-colored bullish candle and has its close price higher than the open price. Additionally, this second candle is also considerably larger than the previous one, and in a way 'engulfs' the previous one, hence the name of the pattern is engulfing pattern. Since this second candle needs to engulf the previous one, it cannot be a doji candle. The lengths of the wicks (also called candle shadows) don't matter. As one can see from the latest examples mentioned in the next section, the second candle completely engulfs the first one.
The body of the first candle should lie somewhere in the range of the second candle. It indicates that the engulfing requirement is limited to the bodies of the two candles, and does not apply to their wicks or shadows which may exceed the total length.
The next requirement for a reliable bullish engulfing pattern is that it should form during a downtrend. It indicates that the price reversal is possible, and the trend of the green-colored candle, with upward price move, can continue for the next few timeperiods of the candle. Although the bullish engulfing is considered to be a strong signal, many traders often wait for a confirmation candle to form which should also be green in color. If that happens, it further bolsters the belief that uptrend has gained momentum. However, those who wait for the confirmation may lose out on buying the stock at a lower price and consequently miss out to reap higher returns. Whether to wait for the confirmation candle or act on the formation of the engulfing pattern remains a choice of the individual trader. With experience, traders get stock-specific confidence to directly take positions after the formation of the bullish candle. This is how a typical bullish engulfing candlestick appears:
Trading the Bullish Engulfing CandlestickThe bullish engulfing forms very regularly on the price charts of all kinds of assets - be it stocks, indexes or exchange-traded funds (ETFs). Its formation on the continued downtrend indicates that the bears (sellers) have been having an upper hand over the bulls (buyers) and they have been ruling the market till now. But the formation of the large length bullish candle indicates that bears are getting tired and losing the control to the bulls, which has resulted in the formation of the green-colored bullish candle much lengthier in size compared to the previous bearish candle.
The formation of the green-colored confirmation candle further bolsters the fact that bulls have taken full control of the market, and are pushing up the prices. Hence, its time to go long - that is, buy the stock, or cut the losses if holding a short position.
Trading decision should be taken based on the type of situation that leads to formation of the bullish engulfing pattern. Bullish engulfing candle gains significance when formed during the downtrend. The formation announces a potential reversal after a long downtrend in the stock prices, especially when the length of the green candle is long enough relative to the earlier red candle.
Additionally, traders may also look for the location of bullish engulfing pattern formation. The lower the first red-candle is placed compared to the green-candle's body, the stronger the signal. Traders enter the trade when the bullish engulfing is formed at the lower Bollinger band breakout, or at the breakout of the trend-line (like 200-day moving average), or similar other range breakouts. The larger the breakout indicated by the length of the green candlestick, the stronger the reversal pattern. If the bullish engulfing is formed in the middle Bollinger band or far away from the trend-line (without breaching the trend-line), then the traders may not consider it as a strong reversal signal and they avoid the trade. When formed around the middle band or away from the breakout range, the bullish engulfing often leads to continuation of the existing trend.
Trading Scenario for Bullish EngulfingHere are the general considerations and scenrio for trading the bullish engulfing candlestick.
▶ Trade Entry: Formation of bullish engulfing during a downtrend is taken as a sign of reversal, that is - the market is expected to go upward in near future. So traders try to take a long position at or around the low price of the bullish engulfing candle. However, as many traders like to wait for the confirmation candle to form, the buy price may be higher as the trend has already kicked in taking the prices higher. That's the tradeoff one needs to accomodate for.
▶ Stop-loss Limit: The stop-loss varies from trader to trader based on their individual trade preferences, but usually while going long they set the stop-loss at 2-3 units below the low price of the bullish engulfing candle. Others who enter at a higher price may like to adjust the stop-loss accordingly.
▶ Profit-levels: While active trading at short intervals, traders must follow a risk-reward ratio to determine the possible profit level from their bullish engulfing pattern trading. For instance, if the stop-loss limit is set at $1 (the maximum loss one is willing to take on a trade) and the risk-reward ratio one follows is 1/2, then one must take profits when it hits $2. If the risk-reward ratio being followed is 1/3, then one must aim for profits when the price hits a level that generated $3 for every $1 stop-loss set.
▶ Market Conditions: More volatile stocks with high beta values often tend to have high occurrences of bullish engulfing formations. Therefore, suitable selection of stocks/ ETFs / indexes is important while taking on bullish engulfing-based trading. Along with the above mentioned bullish engulfing formation requirement, traders should ensure that their selected price range, bands or trend-line limits are getting breached with large moves of the second bullish (and subsequent) candle. This ensures higher success rate of profitability. Although one must note that trading on technical analysis like candlestick patterns has limited success rate, so following strict stop-loss, disciplined trading and efficient capital management is advised.
Example of Bullish Engulfing CandlestickThe following chart shows an instance of bullish engulfing candlesticks and the uptrend that followed shortly after:
As one can observe, the formation of the bullish engulfing candle reversed the downtrend that preceded the first red candle, and led to an upward move indicated by the long green arrow. The example is of Pfizer Inc. (PFE) stock as of 03-Oct-2019. The trend reversal was also confirmed by another green candle which formed immediately after the formation of the bullish engulfing candle, and was located considerably above the first bullish engulfing candle indicating a confirmation for the up move.
Traders usually set their profit targets and stop-loss levels based on the risk-reward ratio of their choice as mentioned in the previous section.
Latest Bullish Engulfing FormationsFKnol.com has a dedicated section on candlesticks where the list of stocks, ETFs and indexes forming bullish engulfing candles is updated on a daily basis. At present, the following are three examples - one each from stocks, ETFs and indexes - which have formed the bullish engulfings as of the mentioned date (in reverse chronological order):
1) On Friday, May 29, 2020, the stock price of Consumer Services sector based Lowe's Cos. (LOW) formed the following Bullish Engulfing Candlestick pattern:
|Today to Previous Day's Body Length Factor:||2.88|
See full details and past history of Bullish Engulfing Candlesticks for Lowe's (LOW)
▶ Full list of stocks which most recently formed the Bullish Engulfing Pattern
2) On Friday, May 29, 2020, the price of Junk based iShares iBoxx $ High Yield Corporate Bond ETF (HYG) ETF formed the following Bullish Engulfing Candlestick pattern:
|Today to Previous Day's Body Length Factor:||9.25|
See full details and past history of Bullish Engulfing Candlesticks for iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
▶ Full list of ETFs which most recently formed the Bullish Engulfing Pattern
3) On Monday, May 4, 2020, the value of popularly tracked leading stock market index NASDAQ 100 (NDX) formed the following Bullish Engulfing Candlestick pattern:
|Today to Previous Day's Body Length Factor:||2.04|
See full details and past history of Bullish Engulfing Candlesticks for NASDAQ 100 (NDX)
▶ Full list of Market Indexes which most recently formed the Bullish Engulfing Pattern
...and there's more. FKnol.com everyday checks the stock price and candlestick formation across hundreds of stocks, ETFs and indexes to look for bullish engulfing formations. Please see the full list of recent bullish engulfing formations for:
▶ Full list of recent Bullish Engulfing Stocks
▶ Full list of recent Bullish Engulfing ETFs
▶ Full list of recent Bullish Engulfing Indexes
The Bottom LineTrading candlesticks like the bullish engulfing needs strict discipline and emotion-free trading. Candlestick trading is a part of technical analysis and success rate may vary depending upon the type of stock selected and the overall market conditions. Use of proper stop-loss, profit level and capital management is advised.
One can also explore the similar candlestick formations on various dates using the below screener:
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