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What is a Bullish Engulfing Pattern?

Candlestick charting is one of the most popular types of graphs. In order to be able to read them, you should be aware of how different signals are created and what information they bear. In this guide, we'll speak on the bullish engulfing pattern.

A bullish engulfing pattern is a special signal colored white. It's created as the closing cost moves above the opening value of the trading day before after the opening price of the current day was lower than the same day’s closing point. This candlestick features a big white skeleton. It follows tiny black patterns that were detecting bearish tendencies. A big white engulfing pattern notifies a trader about the start of the upward price movements. There are also engulfing signals that show bearish trends but today we will concentrate more on bullish ones.

When does it appear and what does it mean?

This signal consists of two candles indicating reversals. The name of it is driven by its behavior when the second candle ‘engulfs’ the black one, which was formed earlier. The next day after this signal appears on the chart, the starting price goes below the previous day’s closing. This causes the traders to buy the asset more actively, which triggers the price growth and starts the bullish trend.

It’s necessary to understand that this signal can be identified, not just when there are white and black candles next to each other. The mandatory requirement to form is a smaller opening point than the previous day’s close. In any other case, the white candle won’t engulf the black one, meaning the pattern won’t be formed. Thus, this value gap is the determining characteristic of this type of signal.

As a rule, the bullish pattern of an engulfing candlestick has a tiny upper wick or doesn’t have one at all. Such a length of the wick indicates that the asset reaches its highest closing price, meaning that at the end of the trading day the upward movements didn’t stop.

It’s necessary to consider such peculiarities when studying trading charts. The analyses of the current candlestick pattern can help to determine the reversal that might take place at the beginning of the next trading day. Thus, when considering the length of the wicks, you can easier understand whether you should go bearish or bullish the following trading day. That’s why you should pay particular attention to engulfing patterns when they appear on the chart.

What traders do when they identify this signal

Bullish engulfing candlestick patterns can indicate the sentiment change. This is a good time for traders to start buying that asset. Aggressive traders start buying at the end of the day, right when they see the appearance of this candlestick. This is often risky because nothing guarantees that the following trading day will start with upward movements. That’s why conservative traders prefer to get more certain about the start of the reversals. Conservative traders start buying when they see that the engulfing signal turned out to be correct in the reversal prediction.

What about any limits?

These tools are considered quite useful signals predicting the reversal of the trend the following day. Nevertheless, they aren’t powerful all the time. Bullish engulfing patterns are most helpful when they appear after a clean downtrend. The thing is that in such cases the start of the upside movement becomes more obvious. If the price fluctuations are very significant and the trend isn’t as clear, this signal isn’t as powerful and determining.

One more big limitation is that candlestick patterns cannot be efficiently used without conjunction with other technical tools. Traders will need indicators and other instruments to analyze the trend properly since the candlestick signal doesn’t show a price target.

What about Bearish Engulfing Pattern

This signal is contrasting with the one described in this article. These engulfing candlesticks appear when the price moves higher. They show that the next trend is more likely to be downward.

Final word

Using a candlestick chart when trading stocks is a good idea if you want to quickly detect trend reversals. Engulfing patterns aren’t the only powerful signals, you should explore more such instruments. But keep in mind that they won’t prevent financial losses if you neglect other analytical tools when studying the performance of the asset. That’s why we suggest that you should learn more about how to analyze the graphs with other tools as well. 

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