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Bullish Engulfing Explained

Beginner

The Bullish Engulfing is one of the most powerful reversal signals. It indicates the exhaustion of a downtrend phase and the beginning of a new positive trend.

Bullish candle

The candlestick reversal starts with the market OPEN below the previous CLOSE (with a gap lower). The price then starts to move higher early in the session (the OPEN is at, or around, the session LOW). The market then begins to rally strongly throughout the session. The CLOSE price of the Bullish Engulfing is above the OPEN of the previous candle. The whole of the previous session’s candlestick body is said to have been ”engulfed”.

With the CLOSE of the Bullish Engulfing candle coming at or near to the HIGH of the session, this reflects a change to a more positive market outlook. The price can then build on this and continue to trade higher during the next candle.

The bullish engulfing candle is best defined as coming at the end of a long downtrend in the market.

N.B. Although the Bullish Engulfing is just one candlestick, it is measured off the previous candle, so is strictly speaking a two-period candlestick set-up.

Bullish Engulfing
BULLISH ENGULFING
  
Price actionThe OPEN of the Bullish Engulfing is below the CLOSE of the previous candle. Following a strong intraday rally, the CLOSE of the Bullish Engulfing is above the OPEN of the previous candle.
Time horizonBullish Engulfing can be effective across all time scales from 5-minute charts up to hourly, daily and weekly. The longer term the horizon, the higher the conviction in the move.
PsychologyThe selling pressure of the downtrend has become exhausted as the market rejects an opening gap lower. The move to a new low in the trend induces a sharp change in outlook as the market rallies. A CLOSE above the OPEN of the previous candle is a move that can sling-shot the market higher into a new recovery phase.
ConfirmationThe price continues to move higher during the next candlestick to close with another positive candlestick.
ConvictionThe larger the previous session that has been engulfed, the higher the conviction, suggesting selling exhaustion has been reached.Also coming at the end of a long trend lower suggests a decisive shift in outlook.Very small candlestick shadows on the Bullish Engulfing suggest a decisive bullish move throughout the session and increase conviction. A close lower in the session after the Bullish Engulfing decreases conviction.
Aborting the patternA subsequent move that breaks below the LOW of the Bullish Engulfing candle would abort the pattern. Subsequently, stop-losses should be placed below the LOW of the Bullish Engulfing candlestick.

Editor

Richard is an independent market analyst with over 20 years of experience working for brokers in London. Most recently he has worked with Hantec Markets and Infinox, focusing on trading education, ana... Continued

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