Bullish and Bearish Engulfing Candlestick Patterns
Till now, in this module, we have covered all the single candlestick patterns. From this section onwards, we will learn another set of candlestick patterns that are formed with the combination of two or more candlesticks. So, let us begin with an Engulfing candlestick pattern that can be either bullish or bearish.
What are Bullish and Bearish Engulfing Candlestick Patterns?
The Engulfing candlestick is multiple candlestick patterns that signal a reversal of the ongoing trend in the market. This candlestick pattern involves two candles with the latter candle ‘engulfing’ the body of the earlier candle. The 1st candle will always be the colour of the prior trend and the second candle will be the reversal candle.
The bullish engulfing candle signals bullish reversal 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 completely engulfing the ‘body’ of the previous red candle.
The bearish engulfing pattern is the opposite of the bullish pattern. It signals a bearish reversal and indicates a 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.
What is the psychology behind the pattern?
Bullish Engulfing Pattern:
As the ongoing trend is down, the prices keep making new lows. In the current downtrend, a bearish candlestick is formed as the market is expected to move lower. On the second day, the price opens below the previous day’s closing price which attempts to make a new low. But this opening price becomes the low price of the day as there is sudden buying interest by the bulls that rises the prices to close higher than the prior day’s open price. This indicates that the bulls are back into action and now the trend may reverse to the uptrend.
Bearish Engulfing Pattern:
As the ongoing trend is up, the prices keep making new highs. In the current uptrend, a bullish candlestick is formed as the market is expected to move higher. On the second day, the price opens above the previous day’s closing price which attempts to make a new high. But this opening price becomes the high price of the day as there is sudden selling interest by the bears that pushes down the prices to close. This indicates that the bears are back into action and now the trend may reverse to the downtrend.
Confirmation
After the bullish engulfing pattern, if a bullish candle is formed after this pattern then it confirms the reverse signal given by this pattern. One must consider a long position only above the high of the reversal engulfing candle keeping the stoploss as the low of the reversal candle. Similarly, after the bearish engulfing pattern if a bearish candle is formed after this pattern then it confirms the reverse signal given by this pattern. One may look out for selling opportunities only below the low of the engulfing candle, keeping high of engulfing candle as the stoploss.
