Bullish Engulfing Pattern is a reversal candlestick pattern which is bullish in nature and appears at the end of a down trend. It is a complex pattern made of two candlelines. The first candle is bearish in nature and the second is bullish in nature.
It’s a Chart pattern that forms when a small red candlestick is followed by a large green candlestick that completely eclipses or “engulfs” the previous day’s candlestick. The shadows or tails of the small candlestick are short, which enables the body of the large candlestick to cover the entire candlestick from the previous day.
Bullish engulfing candles indicate immense buying interest that swallows the range of the prior candlestick low and surpasses the candlestick highs. The buying action is frenzied as the candle usually closes at its highs with little to no upper wick. This in turn triggers more buyers who spill over into the next candle. If the next candle closes higher than the bullish engulfing pattern, the next leg of the uptrend usually forms.
Formation of Bullish Engulfing Pattern
Bullish Engulfing Pattern is formed by the combination of two candlesticks. The first one is a falling red candle and the second is the reversal green candlestick.
The market is in a down trend. The price opens at almost high of the day and as usual the sellers continue to sell. At the end of the session the price closes almost at the bottom for the time period. This results in the formation of bearish red candle, which is the first candle of the Bullish Engulfing Pattern.
On the next day or next time period the price opens below the low of the real body of the previous bearish candlestick. Sellers are making new short trades. Those who are already short in the market are also adding to their position. But the smart money creeps in and starts accumulating shares from these ignorant sellers. As the demand increases the momentum decreases and the prices starts rising. As the prices rises the bears are happy to sell more at a higher price. This facilitates bulls to accumulate more shares at lower price.
The demand continues to increase more than the supply, pushing the price up. As the new short sellers are all in loss, they also start to buy back to minimize their losses. Sensing the change in the trend, the old bears starts booking profits in their short positions. As the bulls continue to increase their long position, the price rise further and at the end of the session the price closes above the real body of the previous candle. This results in the formation of bullish green candle, which is the second candle of the Bullish Engulfing Pattern and it engulfs the real body of the previous candlestick.
Bullish Engulfing Pattern is a major bullish reversal candlestick pattern. They occur at the bottom of a down trend.
- There has to be a clear down trend, whether major or minor.
- The first candle is usually a red candle signifying an ongoing down trend and the second candle is always a green candle.
- The second day green candle’s real body engulfs the first day red candle’s real body.