What is a bullish engulfing model?
The bullish engulfing pattern is a two candle reversal pattern. The second candle completely “engulfs” the real body of the first, regardless of the length of the tail shadows. The upward bullish pattern appears in a bearish trend and is a combination of a dark candle followed by a larger hollow candle. On the second day of the trend, the price opens lower than the previous low, but buying pressure pushes the price higher than the previous high, resulting in an obvious victory for buyers. It is advisable to take a long position when the price exceeds the highest of the second engulfing candle, that is to say when the downward trend reversal is confirmed.
A bullish engulfing pattern can be identified when a small black candlestick, showing a downtrend, is followed the next day by a large white candlestick, showing an uptrend, whose body overlaps or completely encompasses the body of the previous candlestick.
Key points to remember
- A bullish engulfing pattern is a candlestick chart pattern that forms when a small black candlestick is followed the next day by a large white candlestick, whose body overlaps or completely engulfs the body of the previous candlestick.
- Bullish engulfing patterns are more likely to report reversals when preceded by four or more black candlesticks.
- Investors should look not only at the two candlesticks that form the engulfing bullish pattern, but also at the previous candlesticks.
What does a engulfing pattern tell you?
A bullish engulfing pattern should not be interpreted as simply a white candlestick, representing an upward price movement, following a black candlestick, representing a downward price movement. For a engulfing bullish pattern to form, the stock must open at a lower price on day 2 compared to that on day 1. If the price did not deviate, the body of the white candlestick would not have the chance to engulf the body. from the black candlestick from the day before.
Because the stock opens both lower than it closed on day 1 and closes higher than it opened on day 1, the white candlestick in a engulfing bullish pattern represents a day when bears controlled the price of the stock in the morning only to have bulls decisively take over at the end of the day.
The white candlestick of a bullish engulfing pattern usually has a small upper wick, if any. This means that the stock closed at or near its highest price, suggesting that the day ended while the price was still rising. This absence of a top wick makes it more likely that the next day will produce another white candlestick which will close higher than the closed bullish engulfing pattern, although it is also possible that the next day will produce a black candlestick after escaping the opening. Since bullish invasion trends tend to mean trend reversals, analysts pay close attention to them.
Example of a bullish engulfing model
As a historical example, consider the Philip Morris (NYSE: PM) stock. The company’s shares were very long in 2020 and remained in an uptrend. In 2020, however, the stock declined. On January 13, 2020, a bullish engulfing pattern occurred; the price jumped from an opening of $ 76.22 to close the day at $ 77.32. This bullish day overshadowed the intraday range of the day before, where the stock fell slightly. This decision showed that the bulls were still alive and that another wave of uptrend could occur.
Bullish reversal of engulfing candles
Investors should look not only at the two candlesticks that form the engulfing bullish pattern, but also at the previous candlesticks. This broader context will give a clearer picture of the question of whether the engulfing bullish model marks a true reversal of trend.
Bullish engulfing patterns are more likely to report reversals when preceded by four or more black candlesticks. The more the black candlestick precedes the bullish engulfing candle, the more likely there is a trend reversal, confirmed by a second white candlestick closing higher than the bullish engulfing candle.
Act on a bullish engulfing model
Ultimately, traders want to know if a bullish engulfing pattern represents a change in sentiment, which means it may be a good time to buy. If the volume increases with the price, aggressive traders may choose to buy the bullish glow candle towards the end of the day, anticipating an upward movement the next day. More conservative traders can wait until the next day, trading in potential gains for more certainty that a trend reversal has started.
The difference between a bullish engulfing model and a bearish engulfing model
These two models are opposed to each other. A engulfing bearish pattern occurs after an increase in prices and indicates a decrease in future prices. Here, the first candle, in the two candle model, is an upward candle. The second candle is a larger down candle, with a real body that completely engulfs the smaller candle at the top.
Limits of using a bearish engulfing pattern
A engulfing bullish pattern can be a strong signal, especially when combined with the current trend, but they are not bulletproof. Boundary patterns are most useful following a sharp downward price movement, as the pattern clearly shows the change in upward momentum. If the action on prices is jerky, even if the price increases overall, the importance of the engulfing scheme is diminished because it is a fairly common signal.
The engulfing or second candle can also be huge. This can leave a trader with a very large stop loss if he chooses to trade the model. The potential reward of trade may not justify the risk.
Establishing the potential reward can also be difficult with engulfing models, since candlesticks do not provide a price target. Instead, traders will have to use other methods, such as indicators or trend analysis, to select a price target or determine when to exit a profitable trade.