The bullish engulfing candle is one of the forex market’s most straightforward price action signals. Many traders rely on this candlestick pattern to identify potential price reversals and continuations, integrating it into their trading strategies.
This article will cover:
- What is the bullish engulfing pattern?
- How to identify and interpret the bullish engulfing candle in forex trading
- Best approaches for trading forex and NYSE stocks using the bullish engulfing candle
What is a Bullish Engulfing Candle?
The bullish engulfing candle typically appears at the bottom of a downtrend, signaling a surge in buying pressure. This pattern often leads to a reversal in the trend as more buyers enter the market, pushing prices higher. The pattern consists of two candles, with the second candle completely engulfing the body of the previous red (bearish) candle.
The image below illustrates the bullish engulfing pattern emerging at the bottom of a downtrend.
Bullish Engulfing Pattern at the Bottom of a Downtrend
The following image highlights the bearish and bullish candles that form the bullish engulfing pattern.
How to Spot a Bullish Engulfing Pattern and What Does It Mean?
Characteristics of a Bullish Engulfing Pattern:
• A strong green candle that completely ‘engulfs’ the body of the previous red candle (wicks can be disregarded).
• Occurs at the bottom of a downward trend.
• The signal is stronger if the red candle is a doji or if subsequent candles close above the high of the bullish candle.
What Does It Tell Traders?
• Indicates a trend reversal to the upside (bullish reversal).
• Suggests that selling pressure is losing momentum at this key level.
Advantages of Trading with the Bullish Engulfing Candle:
• Easy to identify.
• Offers attractive entry levels once confirmation of the bullish reversal is received.
Know the Difference Between a Bullish and a Bearish Engulfing Pattern
Engulfing patterns can be either bullish or bearish. The bearish engulfing pattern is essentially the opposite of the bullish engulfing pattern discussed earlier. Instead of appearing in a downtrend, it forms at the top of an uptrend, signaling traders to go short. This pattern is characterized by a green candle being engulfed by a larger red candle.
Bearish Engulfing Pattern
• Location: Appears at the top of an uptrend.
• Signal: Indicates a bearish reversal, suggesting it’s time to sell or go short.
Summary of the Main Differences Between Bullish and Bearish Engulfing Patterns:
| Engulfing Pattern | Characteristics | Location | Signal |
|---|---|---|---|
| Bullish Engulfing | Green candle engulfs previous (smaller) red candle | Appears at the bottom of a downtrend | Bullish signal (Bullish reversal) |
| Bearish Engulfing | Red candle engulfs previous (smaller) green candle | Appears at the top of an uptrend | Bearish signal (Bearish reversal) |
Using a Bullish Engulfing Candlestick Pattern in Trading
Bullish Engulfing and Forex Trading
The bullish engulfing candle pattern is illustrated in the GBP/USD daily chart below, appearing within a downtrend. In this example, subsequent candles confirmed the bullish signal by closing above the high of the bullish engulfing candle. A stop-loss can be set below the low of the bullish engulfing pattern, with a target placed at a key level where the price has previously rebounded—typically the recent swing high—ensuring a positive risk-to-reward ratio.
Bullish Engulfing and Stock Trading
The bullish engulfing pattern is not only popular in forex trading but is also applicable to the stock market. Below is an example of a bullish engulfing trading strategy using FedEx Corp (FDX), listed on the NYSE.
Building confidence when trading the bullish engulfing candle involves complementing the candle formation with supporting signals or indicators.
In the chart below, a Dragonfly Doji appears just before the bullish engulfing pattern, signaling a rejection of lower prices. This aligns with a bullish bias, supported by an oversold signal on the RSI at the bottom of the chart. These additional signals provide stock traders with greater conviction before executing the trade.
The stop-loss can be placed below the recent swing low, which is the low of the Dragonfly Doji. The target (limit) can be set at a key level where the price has previously bounced, provided it offers a positive risk-to-reward ratio.
