Bullish Engulfing Pattern Trading Strategy Guide

The strategy you’re about to learn has three requirements to be considered a valid setup. This means the opening price of the second candle is lower than the closing price of the first, and the closing price of the second candle is higher than that of the first. The Japanese yen remains under pressure, trading near a five-month low against the US dollar. This trend is primarily driven by differences in monetary policy approaches. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority.

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Then, the price successfully tested the first resistance level 24.80, having previously formed another bullish engulfing candlestick pattern. It should be noted that these patterns are formed at almost every new level that the bulls have overcome within the trend. At the same time, a bearish engulfing pattern has formed at the level of 27.20, which indicates the critical importance of this level for traders. However, the sellers’ attempt to change the situation was unsuccessful, as indicated by bullish hammer patterns. Engulfing Candle is a popular candlestick pattern used in technical engulfing candle strategy analysis to identify potential trend reversals in financial markets.

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However, it is important to further confirm the pattern using other candlestick patterns or technical indicators. A bullish engulfing pattern is a pattern in which the second ascending candle engulfs the first bearish candle. That is, the bulls show their strength and open large purchases of the asset. The engulfing pattern is of Japanese origin, where candlestick technical analysis appeared in the 18th century on the rice exchange.

Advantages of Trading on the Bullish Engulfing Pattern

1. When the market closes above the previous day’s open, it indicates strength from buyers and the potential for a bullish reversal.
2. Also, engulfing the shadows of the first candle in addition to its body enhances the effect and increases the possibility of a reversal.
3. During broader uptrends, pullbacks that form a bullish engulfing pattern are also more likely to play out.
4. Bollinger Bands are a technical analysis tool comprising three bands.
5. This pattern suggests a shift in control from buyers to sellers, often interpreted as a signal to enter a short position as it can indicate a market reversal following an uptrend.
6. This pattern appears after a downtrend, and has a large initial red candle, with a smaller green pattern following it.

A bearish engulfing pattern is the opposite of a bullish engulfing; it comprises of a short green candle that is completely covered by the following red candle. It is formed of a short red candle next to a much larger green candle. The bullish engulfing pattern is one of my favorite reversal patterns in the Forex market. I have previously written about how to trade the bearish engulfing pattern, and as you might expect there are many similarities between the two.

Bullish Engulfing Pattern vs. Bearish Engulfing Patterns

This pattern indicates that buyers have stepped in to push the price higher, and refused to let it close below the initial, powerful red candle. When formed at a key support level, the bullish harami pattern often means that the level is being respected, and we can potentially see a bounce. The use of moving averages is another strategy that can enhance the effectiveness of the bullish engulfing pattern. A bullish engulfing pattern that forms and closes above a moving average often signifies a stronger bullish move is coming. It can sometimes give you false signals, especially when the market is choppy, i.e., no significant price change over a few days. Therefore, using other candlestick patterns or technical tools in conjunction with the Engulfing candlestick pattern is necessary to avoid losing your funds.

Also, engulfing the shadows of the first candle in addition to its body enhances the effect and increases the possibility of a reversal. The size of the Engulfing Candle’s body is an important factor to consider when analyzing the pattern. A larger Engulfing Candle indicates a stronger shift in market sentiment and a higher probability of a trend reversal. Conversely, a smaller Engulfing Candle may indicate weaker sentiment and a higher chance of a false reversal signal. Therefore, traders should pay attention to the size of the Engulfing Candle’s body when using this pattern in their analysis. In the chart above you can see a great example of this strategy in action.

1. Setting a stop-loss above the high of the engulfing candle or slightly above the Fibonacci level can help limit potential losses.
2. Choosing the right trading journal is essential for traders wanting to analyze performance, refine strategies, and improve consistency.
3. The ideal scenario for a engulfing pattern to be accurate is when the second candle has a large body, as this suggests a building momentum.
4. It combines two types of analysis methods to generate trading signals.
5. With the trend isolated and a pullback occurring, wait for the engulfing candle strategy trade signal.

In reaction to this, traders, anticipating further decline, drove down prices. To combat this weakness, you can opt to use the ATR (Average True Range) indicator. The ATR is fantastic for setting a stop loss because it informs you of an objective price point to safeguard against stop hunts. We can often extract valuable insights just by looking at how a pattern plays out in the price charts. Let’s look at how the SPX behaved back in 2008 to 2009, following the housing crisis crash. Secondarily, it’s also a great confirmation pattern that can pair with many trading systems.

Then, another series of bullish engulfing and hammer patterns formed in the chart. Price lows and highs are also rising, which is another sign of a bullish reversal. This strategy involves opening positions on a trend reversal after the pattern formation. Opening/closing a trade is carried out according to the rules of risk and money management. After an upward trend, the asset price reversed down in the key resistance zone.

This is reflected in our example on EURUSD 1D chart, where the price has fallen to a key support level with the aforementioned RSI conditions. This example is slightly more complex since we can see three bearish Engulfing patterns identified by the candles. The first appears on October 13th-14th, with the first candle being a long green candle and the second being an even longer red candle.

While this pattern offers valuable insights into potential trend reversals, it’s essential to complement it with technical indicators and robust risk management for effective use. Open an FXOpen account today to take advantage of access to over 600 markets, spreads from 0.0 pips, low commissions, and four advanced trading platforms. A bullish engulfing pattern occurs when a large bearish bar is followed by a larger candlestick that completely overtakes the former’s body. This indicates a strong potential reversal from a downtrend to an uptrend.

According to strategy, open a buy trade when a bullish engulfing candlestick forms above the 20-period exponential moving average. So, by the confluence of moving average and candlestick pattern, a perfect buy setup formed like the image below. The bullish engulfing candle strategy involves identifying this pattern at the end of a downtrend as a signal for a potential sentiment shift. Traders typically enter a buy position slightly above the high of the closing bar, with stop-loss levels set below the low or beneath nearby support levels. Take-profit levels are determined based on risk/reward ratios or key resistance levels.