The bullish Engulfing pattern is one of the clearest signals in the forex market. Many traders use this pattern to identify trend reversals. At the same time, it predicts price continuation, thereby supporting trading decisions. Let’s join Forex Trading to learn about Candle bullish engulfing and its uses!
What is the Candle bullish engulfing pattern?
The bullish Engulfing pattern appears at the end of a downtrend, showing that buying pressure is increasing. The Bullish Engulfing candle signals a reversal as many buyers begin to enter the market. From there, this event pushed prices higher. The structure of the bullish Engulfing pattern includes two candles. In which the second candle completely covers the body of the previous red candle.
How to identify the Engulfing candlestick pattern and its meaning in Forex?
Like the butterfly pattern, the Bullish Engulfing candlestick pattern is an important signal in technical analysis. To take advantage of opportunities, traders need to clearly understand how to identify them and what they mean. The following paragraphs will help you discover the core characteristics of the bearish engulfing candlestick pattern.
Common characteristics of the candle bullish engulfing pattern
Traders need to accurately identify this pattern on the chart based on the following characteristics:
Bullish Engulfing candles are a group of 2 candles with the following characteristics:
- The first candle is a green candle with a short body, the length of the wick is not important. If this candlestick is Doji or Spinning Top, the signal is even more reliable. Because it shows hesitation between the two camps in the current trend.
- The second candle is a red candle with a large body. It must completely cover the previous candle (excluding the wick).
- The opening price of the red candle must be higher than the closing price of the previous green candle. At the same time, the closing price of the red candle must also be lower than the opening price of the green candle.
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- Location of appearance: Candle bullish engulfing can appear in any location. However, the model only gives bearish reversal signals in two cases. One is when it appears at the top of an uptrend. The second is during the correction phase of the downtrend.
- The trading volume of the second candle is very high.
The important meaning of the Bullish Engulfing candlestick pattern in trading
Besides the hammer candlestick reversal, understanding the meaning of the Bullish Engulfing candlestick pattern will help traders apply it more effectively in trading. Here are some important points of the Bearish Engulfing candlestick that traders should keep in mind:
- Indicates entry/exit points for traders
The Bullish Engulfing candlestick appears at the top of an uptrend or during the correction phase of a downtrend. At that time, it will give a reversal signal from increase to decrease. At this time, traders can consider opening Sell orders or closing active Buy orders.
- Describe the psychological developments of players in the market.
The Candle bullish engulfing provides an entry signal. Not only that, it helps traders better understand market psychology. The first candle shows that buyers are still in control, pushing the price up according to the current trend. But the second candle shows the dominance of the sellers, gaining control of the market.
Bullish Engulfing candlestick strengths and weaknesses need attention
- Easy to recognize.
- The entry point becomes attractive when there are clear signs of a bullish reversal.
Difference between Bullish Engulfing and Bearish Engulfing
Engulfing patterns can be of the bullish or bearish type. The bearish pattern is the opposite of the bullish pattern mentioned earlier. It appears at the top of an uptrend and gives a signal for short selling. The main feature is that a green candle is completely covered by a larger red candle.
Engulfing Bearish candlestick pattern
Below is a summary of the main differences between bullish and bearish Engulfing patterns. Traders should clearly understand these points to avoid receiving false signals.
- Bullish Engulfing: The green candle covers the entire previous red candle (which was smaller). Green candles are often seen at the bottom of a downtrend. It can predict and signal bullish reversals.
- Engulfing Bearish: The red candle covers the previous green candle (smaller green candle). Red candles are often seen at the top of an uptrend. This is a bearish signal (reversal to bearish).
Use the candle bullish engulfing pattern in trading
The Bullish Engulfing candlestick pattern appears in the context of a downtrend. Subsequent candles will confirm the signal if they close above the high of the bullish candle. To manage risk, the stop loss can be placed below the low of the bullish Engulfing pattern. While the take profit point should be placed at the recent resistance level where the price has previously reversed. This ensures a positive Risk-Reward ratio.
The Candle bullish engulfing gives a bearish reversal signal, allowing you to open a Sell order to catch the downtrend. Depending on the location where this pattern appears, traders can choose one of the following two trading methods:
Reversal trading using Candle bullish engulfing
The method is applied when the Bearish Engulfing candlestick appears during the correction phase of a downtrend. However, to implement this strategy, traders need to confirm that the downtrend is still strong. They can check charts and use other tools to confirm.
Then, use other technical analysis tools to confirm the bearish reversal signal. If all points indicate that the price is likely to return to the old trend, traders can place a Sell order following the trend as follows:
- Method 1: Place an order right when the Bearish Engulfing candlestick closes. This could yield higher profits if prices continue to fall as expected. However, it comes with risks if the price does not decline after the Bearish Engulfing pattern forms.
- Method 2: Wait for the red candle to confirm the bearish signal that appears after the Bearish Engulfing before making the transaction. This is considered the most stable and safe method at present. However, this method can cause traders to miss the best entry point in some cases.
- Stop loss/take profit: Place stop loss a few pips away from the nearest peak. You can take profit at an R: R ratio greater than 1:2.
The GBP/USD currency pair in the 5-minute time frame is in a strong downtrend. Then, the Bearish Engulfing candlestick appeared during the upward correction phase of this trend. This is a sign that the upward adjustment period has ended. Price is about to continue falling following the main trend.
Additionally, when the PSAR dots move up and the MACD crosses the signal line from top to bottom. That is also a sign of a downtrend. Traders can enter orders based on this signal as mentioned before.
Trade with the trend
Reversal trading can bring a lot of profits to traders. However, this method also contains many risks. Therefore, we do not recommend new traders to apply. This strategy is often implemented when the Bearish Engulfing candlestick appears at the top of an uptrend. It will be best when this trend has begun to show signs of weakening.
Traders can confirm this signal when the price action continuously fails to create new highs higher than the previous one. In addition, using tools such as trendlines or price channels also helps to check the trend. To strengthen the prediction of a reversal, traders should combine other indicators such as PSAR and MACD. You can also use price patterns and reversal candles to get the same effect.
Traders can open a Sell order to catch the upcoming downtrend, as follows:
- Entry points and stop loss points follow the same rules as the trend trading method.
- Profit taking: The downtrend could persist, creating opportunities for higher profits. Traders can set the take profit level according to the ratio R: R > 1:3. Or you can place it at the support level to optimize profits.
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The EUR/USD pair in the 5-minute timeframe initially has an upward trend. However, this trend begins to weaken when it fails to create new peaks and troughs higher than previous peaks and troughs. Then, a Bearish Engulfing candlestick appears at the top of the uptrend. At the same time, PSAR moves above the price chart while MACD crosses below the signal line. Traders can see this as an opportunity to enter a Sell order according to the previous instructions.
Epilogue
Through this article, you have learned more deeply about the Bullish Engulfing candlestick pattern. We discussed the main characteristics, and how to identify this model. At the same time, we also introduce trading methods based on the signals it provides. Forex Trading hopes this information will help you better understand Candle bullish engulfing.
Candle bullish engulfing FAQ
How to trade the Candle bullish engulfing pattern?
To trade the Bullish Engulfing candlestick pattern, traders often wait for the second candle to confirm the bullish reversal signal. They can then enter a BUY order at the closing price of the engulfing candle. At the same time, they place stop losses below the lowest price of the model to limit risks.
Is the Candle bullish engulfing pattern reliable?
The Bullish Engulfing candlestick pattern is considered reliable when it appears in the right location. For example, at the end of a downtrend or during a correction. However, as with all technical analysis tools, reliability depends on other factors such as trading volume and market context.
Combine the Bullish Engulfing candlestick pattern with which indicators to increase accuracy?
To increase accuracy, the Bullish Engulfing candlestick pattern is often combined with other technical indicators such as RSI, MACD, or Stochastic. Using indicators helps confirm reversal signals and minimize trading risks.
