Bearish/Bullish Engulfing Pattern

The Engulfing candlestick is a type of candlestick pattern that tends to signal a reversal of the ongoing trend in the market.

This candlestick pattern involves two candles with the latter candle ‘engulfing’ the entire body of the prior candle.

The engulfing candlestick can be bullish or bearish based on where it forms in relation to the ongoing trend.

What is a Bullish Engulfing Pattern?

The bullish engulfing candle signals reversal of a downtrend and indicates a rise in buying pressure when it appears at the bottom of a downtrend.

This pattern triggers a reversal of the ongoing trend as more buyers enter the market and move the prices up further.

The pattern involves two candles with the second green candle that is completely engulfing the ‘body’ of the previous red candle.

What is a Bearish Engulfing Pattern?

The bearish engulfing pattern is the opposite of the bullish pattern.

It signals a reversal of the uptrend and indicates fall in prices by the sellers who exert the selling pressure when it appears at the top of an uptrend

This pattern triggers a reversal of the ongoing trend as more sellers enter the market and they make the prices fall.

The pattern involves two candles with the second bearish candle completely engulfing the ‘body’ of the previous green candle.

Formation of Bullish and Bearish Engulfing Patterns

This is what the formation of an engulfing Pattern looks like:

What do Bullish and Bearish Engulfing Patterns tell you?

Engulfing candles help traders in spotting trend reversals and also assist traders with an exit signal.

1. Trend continuation

Engulfing patterns support the continuation of the ongoing trend, for example, when spotting a bullish engulfing pattern in an uptrend, it indicates that the ongoing trend will continue.

2. Reversals

Bullish and Bearish Engulfing patterns signal reversal in the trend.

When a bullish engulfing pattern is found at the bottom of a downtrend it signals a downtrend reversal.

Similarly, when a bearish engulfing pattern is found at the top of an uptrend it signals an uptrend reversal.

3. Exit strategy

This pattern can also be used as a signal to exit if the trader holds a buying or selling position in the ongoing trend that is coming to an end.

Trading Example

This is an example of a Bearish Engulfing Pattern (indicating a downtrend):

This is an example of a Bullish Engulfing Pattern (indicating an uptrend):

Limitations of Using Engulfing Patterns

A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend; however, they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

Key Takeaways

• The Engulfing candlestick involves two candles with the latter candle ‘engulfing’ the entire body of the prior candle.
• The engulfing candlestick can be bullish or bearish based on where it forms with the ongoing trend.
• The bullish engulfing candle signals reversal of a downtrend and indicates a rise in buying pressure when it appears at the bottom of a downtrend.
• The bearish engulfing signals reversal of the uptrend and indicates fall in prices by the sellers who exert the selling pressure when it appears at the top of an uptrend
• Engulfing candles help traders in spotting the trend reversals indicated trend continuation, and also assist traders with an exit signal.