Bullish engulfing pattern is a popular candlestick pattern used by traders to identify potential bullish reversals in the market. This pattern consists of two candlesticks, where the first candlestick is a smaller red or bearish candlestick and the second candlestick is a larger green or bullish candlestick that completely engulfs the first candlestick.
The bullish engulfing pattern typically forms at the end of a downtrend and indicates that the selling pressure has been exhausted and that buyers are starting to enter the market. The pattern is considered to be a strong buy signal when it is confirmed by other technical indicators, such as volume or momentum indicators.
To recognize a bullish engulfing pattern, traders look for the following characteristics:
- The first candlestick should be a red or bearish candlestick that represents a downtrend.
- The second candlestick should be a green or bullish candlestick that opens below the previous day’s close and closes above the previous day’s open.
- The green candlestick should completely engulf the red candlestick, including its shadows.
- The pattern should be accompanied by high trading volume, which indicates strong buying pressure.
Once the bullish engulfing pattern is identified, traders can use it to enter long positions or add to existing long positions. They can also use it to set stop-loss orders to protect their positions.
Here’s an example of how a Bullish Engulfing pattern is look like in a BankNifty chart:
On 20th April 2021, BankNifty opened at 31544 and had a bearish sentiment throughout the day, closing at 31155. The next day, 22nd April2021, BankNifty opened at 30770 and continued to trade lower in the first hr of the day, reaching a low of 30511. However, in the second half of the day, the sentiment changed and the bulls took over, pushing the price higher. The day ended with BankNifty closing at 31704, above the previous day’s close which is almost 1000 point move. And if we buy when this candle high is taken out a good up move we can capture.
The first candle on 20th April’21 was a bearish candle, indicating the continuation of the downtrend. The second candle, however, is a larger bullish candle that completely engulfs the first candle, indicating a potential reversal in the market sentiment from bearish to bullish. This is an example of a Bullish Engulfing pattern in BankNifty chart.
However, it is important to note that the bullish engulfing pattern is not always a reliable indicator of a bullish reversal. Traders should always use other technical indicators and conduct proper risk management to make informed trading decisions.