Bullish Engulfing Pattern

This is another pattern among Japanese candlesticks and is a major reversal pattern comprised of two opposite colored bodies. It is formed after a downtrend which means that it opens lower than the previous day’s close and closes higher than the previous day’s open. The first candlestick represents a falling share price (red or black image) and the second candlestick represents the share price starting low and ending up at or near its highs (green or white image). In order to qualify as a bullish engulfing pattern, the green candle must completely engulf the body of the previous red candle, there must have been a definable downtrend, and the body of the second candle must be the opposite color of the first candle. The size of the red candlestick is of no consequence, however the shadows (or tails) of the small candlestick (red) are short, which enables the body of the large candlestick (green) to cover the entire candlestick from the previous day. The size of the green candle, however is of consequence because the larger it is, the more bullish the reversal.

The bullish engulfing pattern is used when a stock has been declining and it typically represents a change in investor sentiment. The assumption that this pattern carries is that after a period of selling pressure, the green candle forms because the stock has opened below the previous close and the buyers moved in and pushed the price higher. (The exception to this rule, however, is if the first real body of the engulfing pattern is a doji or an extremely small body. A doji candlestick chart engulfed by a very large green real body could be a bottom reversal). In order to confirm this pattern, the share price must strengthen further in the following time period, or in other words, a bullish confirmation should come within 1 to 3 time frames after the pattern.

The name of this pattern implies that the bulls have taken control of a security’s price movement from the bears. The bullish engulfing pattern is associated with a declining trend in a security, which implies that a low or end to a security’s decline has occurred. It is however, the traders’ responsibility to consider the previous and the following days’ prices before making any decisions regarding the security. In other words, the bigger the engulfing of the previous days’ candle, the more effective the new trend signal is. The lower the open of the green candle, with it coming back up to engulf the previous day, the more powerful the next advance should be.

The bullish engulfing pattern is one of the major signals among 40 Japanese candlestick reversal and continuation patterns. Japanese rice traders, for over 400 years, recognize this pattern as one that signifies price reversals with enough strength to warrant placing trades.

Continue your Japanese Candlestick education and read about bearish engulfing patterns.