Bullish Engulfing Pattern
By: PipsAngels
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Bullish Engulfing Japanese Candlestick Pattern
This has been proven to be a very high-probability reversal signal over hundreds of years. We will break down the individual pieces of the bullish engulfing signal and show you how investor sentiment can cause a reversal.
The Bullish Engulfing pattern contains two opposite colored bodies and indicates that a major reversal pattern may be forming. It is also the opposite of the Bearish Engulfing pattern.
For the Bullish Engulfing pattern, the previous trend is in a downward direction.
The Bullish Engulfing Pattern opens lower than the previous day’s close, but closes higher than the previous day’s open. Notice how the Bullish Engulfing Signal completely “engulfs” the previous day’s body.
Here are the pattern Rules:
- The body of the second day completely engulfs the body of the first day. Ignore the wicks or shadows.
- Previous bars have been in a definitive downtrend, even if short term.
- The first candle in this pattern is black, matching the previous trend (with the possible exception of being a DOJI or an extremely small body).
- The second candle has a white body (i.e. reversal of the trend)
Possible Signal Strengtheners:
- If the Engulfing Signal is a large body and engulfs a very small body from the previous day, it shows the trend was slowing. The large body Engulfing Signal indicates the new direction (reversal) has started with strength.
- If the downtrend was fast and furious, when the reversal hits there will be less resistance to the move up, thus increasing the profit potential.
- While you ignore the shadows for determining if the signal is indeed a Bullish Engulfing Signal, if the body of the engulfing signal completely encompasses the upper and lower shadows of the previous day, it shows extremely strong support for the reversal to continue.
- The larger gap created between the open from the engulfing signal from the previous close, the greater the chance of a strong reversal.
- The Bullish Engulfing Pattern is confirmed by a third white candlestick, with a higher close than the second day. This is the Three Outside Up signal.
General Analysis and Investor Sentiment:
The market trend was on its way down. The price opens lower than where it closed the previous bar. By the end of the time frame, the buyers have come out in force and moved the price above where it opened the day before. Suddenly investor sentiment sees the trend has been changed.
The Bullish Engulfing Pattern represents the reversal of the downward trend investor sentiment. Using this pattern as a buy signal is potentially profitable because the Bullish Engulfing Pattern has signaled that the Bulls are ready to buy, and the Bears are losing steam.
That's it for the Bullish Engulfing Pattern. Keep learning and mastering Forex right here at PipsAngels.com.
