The Bullish Engulfing candlestick pattern is one of the clearest price action signals on candlestick charts. Many traders use this pattern to identify potential price reversals in support of their trading strategies. In this article, Tipstrade.org will help you gain a comprehensive understanding of the Bullish Engulfing pattern and how to trade it effectively.
What is a Bullish Engulfing candlestick?
In Price Action-based technical analysis, the Bullish Engulfing candlestick is considered one of the most reliable bullish reversal patterns. This pattern consists of two candles that appear at the end of a downtrend, signaling weakening selling pressure and a strong resurgence of buying momentum.
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Identifying a Bullish Engulfing candlestick
The Bullish Engulfing pattern consists of two opposite Japanese candlesticks, as follows:
- The first candle: A bearish candle (red/black) with a small real body, indicating weakening selling pressure.
- The second candle: A bullish candle (green/yellow) whose real body completely engulfs the body of the first candle, showing that buyers have decisively pushed prices higher after a period of decline or consolidation.
What does the Bullish Engulfing candlestick tell us?
The Bullish Engulfing candlestick pattern signals a potential reversal from a downtrend to an uptrend. The strong bullish second candle reflects decisive dominance by buyers, indicating that buying pressure has completely “engulfed” selling pressure and may continue to push prices higher.
When the Bullish Engulfing pattern appears at a key support level and is accompanied by increased trading volume, the reliability of the reversal signal is further strengthened, creating favorable opportunities for traders to enter buy positions.
Trading strategy with the Bullish Engulfing candlestick
Below are three ways to trade the Bullish Engulfing candlestick pattern without combining it with other technical indicators:
Method 1: Place a Buy Stop order as soon as the Bullish Engulfing candlestick is completed
- Place a Buy Stop order above the high of the Bullish Engulfing pattern.
- Set the stop-loss (SL) slightly below the lower shadow of the bullish candle to avoid being stopped out prematurely.
- This is the safest approach and helps avoid false signals if the price has not yet moved strongly upward.
Method 2: Place a Buy order immediately after the Bullish Engulfing candlestick is completed
- Enter a Buy order at the closing price of the bullish candle.
- Set the stop-loss (SL) below the lower shadow of the bullish candle in the Bullish Engulfing pattern, or at the lowest point of the previous down swing, to protect the account if the market moves against the position.
- This method allows traders to enter the trade immediately once the pattern is confirmed, quickly taking advantage of the market’s upward momentum.
Method 3: Place a Buy Limit order
- Place a Buy Limit order at a price equal to the midpoint (50%) of the bullish candle in the pattern.
- Set the stop-loss (SL) at the lowest point of the bullish candle’s shadow or at the nearest support zone.
- This method allows traders to enter at a better price, increasing potential profit; however, there are cases where the order may not be filled if the price continues to rise without a pullback.
How to determine take-profit levels:
- Take profit at resistance levels: Traders often set take-profit targets at resistance zones, as prices are likely to reverse or experience a pullback at these levels.
- Take profit based on the risk–reward ratio: First, define the stop-loss level, then set a take-profit target so that the risk–reward ratio is 1:2 or 1:3.
Example of how to enter a trade with the Bullish Engulfing candlestick
Below is a specific example of how to place a trade on the ETH/USDT pair when a Bullish Engulfing candlestick pattern appears on the chart.
After the pattern is completed, you can apply the Buy Stop strategy to trade the bullish engulfing pattern.
- Place a Buy Stop order at 2,342 USDT, slightly above the high of the second candle, to ensure that the trade is entered only after the trend is confirmed.
- Set the Stop Loss slightly below the second candle at 2,215 USDT to protect your capital.
- Set Take Profit targets at resistance levels, around 2,658 USDT, 3,007 USDT, and 3,376 USDT.
Notes when trading with the Bullish Engulfing candlestick
To trade effectively using the Bullish Engulfing candlestick pattern, you should keep the following points in mind:
- Trading volume: The signal becomes stronger when the second bullish candle is accompanied by high trading volume. This indicates strong buyer dominance and confirms the potential for further price increases.
- Trading position: The Bullish Engulfing pattern is most meaningful when it appears at support levels or after a strong downtrend. These are times when buying pressure may increase.
- Combine with other technical indicators: Traders should not rely solely on the Bullish Engulfing pattern to enter trades immediately. It is important to confirm the signal using additional technical indicators such as RSI or MACD to improve reliability.
- Risk management: Always set a clear stop-loss level, often placed below the bottom of the Bullish Engulfing candle pattern, to protect capital in case the market does not move according to expectations.
Conclusion
The Bullish Engulfing candlestick pattern is one of the simplest patterns and provides easily recognizable signals. Hopefully, this article has comprehensively covered the key knowledge related to the Bullish Engulfing pattern and helped investors gain additional trading strategies. Wishing all investors great success.
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