When you begin trading, you would want to avoid unnecessary risky trades. Then, one must start learning the candlestick patterns, as they are easy to identify and trade with a better understanding of price action, allowing for more efficient trading. They also help you identify the potential reversal in the price chart. One among those is the Bullish Engulfing candlestick pattern.
In this article, we will begin by defining what a Bullish Engulfing is, its structure, the psychology behind the pattern, how to trade it with an example, its advantages, and its disadvantages.
What is Bullish Engulfing?
The Bullish Engulfing candlestick pattern indicates the potential bullish reversal in a downtrend and signals the change in the market momentum from bearish to bullish, using a two-candlestick formation.
The candlesticks pattern displays that the sellers are slowly losing control over the trend, and the buyers are aggressively taking control of the trend.
Structure:
The Bullish Engulfing is spotted at the bottom of the price chart.
- First Candlestick: A small body bearish candlestick indicates the significant strength of the sellers to continue a downtrend.
- Second Candlestick: A large bullish candlestick that completely covers the previous candlestick as it opens below the low and closes above the high of the first candlestick, signaling a reversal from a downtrend to an uptrend.
Psychology Behind the Bullish Engulfing Candlestick Pattern
- Bearish Candlestick: At the current downtrend of the security, the sellers are driving the price to its low, indicating further downward movement.
- Buyers take control and Trend Reversal: The second candlestick opens below the low of the first candlestick as sellers are dominating the trend, and with a clear intention to push the price down. At the start of the second candlestick, buyers aggressively start to push the price up, resulting in a strong bullish candlestick, and it closes above the high of the first candlestick. The buyers take over the trend, overwhelming the seller, indicating a change in the current trend.
How to Trade the Bullish Engulfing?
It is recommended to wait for confirmation to avoid false signals and unnecessary risk.
- Entry
- As the third candlestick closes bullish above the high of the second candlestick, plan for a long entry.
- Stop-loss
- An ideal stop-loss is the low of the second candlestick of the bullish engulfing pattern.
- Target
- The initial target for the long entry trade can be the nearest resistance line, or the target can be based on one’s risk-reward ratio.
- If there is any candlestick pattern formed signaling a reversal, you can plan an exit.
Example of trade scenario:
In the image below, you can look at the chart of “RIL Ltd” stock at a 1-hour timeframe on 5th March 2025. You can see the buy signal generated by the Bullish Engulfing candlestick as it is a trend reversal.
What are the advantages of the Bullish Engulfing candlestick pattern?
- Using the Bullish Engulfing pattern, you can capture the entire trend as it provides an early indication of trend reversal.
- The pattern is easy to identify and trade for beginners.
- The pattern provides a good risk-reward ratio, as you will be trading a minimal stop-loss.
- The pattern is versatile across all timeframes and security trading markets, as a single strategy applies to all markets.
What are the disadvantages of the Bullish Engulfing candlestick pattern?
- In lower timeframes, it is often spotted, making it hard to identify the potential reversal.
- It indicates reversal, but it does not display the strength of the upcoming reversal pattern.
- In sideways markets, after the formation of the pattern, it might result in a wrong trade due to a lack of volume in the security.
- The candlestick pattern lacks confirmation within the pattern, making it dependent on the following candlesticks.
In Closing
In this article, we have explored the Bullish Engulfing, its structure, the psychology behind the pattern, how to trade it with an example of a trade scenario, its advantages, and its disadvantages.
Bullish Engulfing is an efficient strategy to identify the potential bullish reversal, especially when the security is in a downtrend. At the same time, the Bullish Engulfing offers multiple opportunities for beginners with clear entry and exit signals and making it an accessible and reliable pattern to trade.
Across the financial markets all over the world, no indicator or tool is 100% accurate, and when the Bullish Engulfing candlestick pattern is combined with additional indicators or tools like RSI, MACD or other tools, its efficiency and accuracy increase rapidly, and with proper risk management, discipline, and back testing of the strategy can pave the path to profitability.