Patterns, indicators and support & resistance levels are very important in conducting a technical analysis. Some patterns help trends continue and some reverse them.
Bullish Engulfing pattern definition
The Bullish Engulfing pattern is made of two candlesticks. The first candle is bearish black or red in color, the second candle is bullish and larger in size. The second candle completely overlaps or engulfs the body of the previous candle. The pattern develops at the bottom of the bear trend and reverses it.
Why is understanding Bullish Engulfing important for traders?
- The pattern can help spot trend reversals and give traders time to prepare for trading new trends.
- The Bullish Engulfing can help traders manage active trading positions.
- The pattern is easy to spot on the chart and it’s easy to to trade.
- Bullish Engulfing can give traders an opportunity to trade a new trend from the very beginning.
Thorough Bullish Engulfing Explanation
Bullish Engulfing is developed at the bottom of a downtrend. It takes 2 candlesticks to form the pattern. The first candlestick follows the bear trend and the second one represents the shift in the sentiment. The second candle is larger than the first one, which means that buyers are taking the initiative.
Traders join the trade when the second candle closes and they put the Stop Loss outside the downtrend. The Take Profit target is unclear, since the pattern indicates the beginning of a new trend. Traders use moving average and volume indicators to measure the strength of a new trend.
Example of Bullish Engulfing in Forex
When trading the pattern in the Forex market, there are a number of things to consider. The first limitation of the pattern is that it’s purely technical and doesn’t take into account fundamentals. Moreover, the pattern works better in larger time frames.
Furthermore, if the second candle is too large, the Stop Loss target might be too extended. As a result, the potential reward might not justify the risk.
The pattern works differently in different markets. Choppy and highly volatile trading conditions might produce a lot of false signals. And it’s always wise to backtest the strategy first before using any trading system.
FAQs on Bullish Engulfing in Trading
What does the Bullish Engulfing pattern indicate?
The Bullish Engulfing forms at the bottom of a bear trend and indicates reversal. The second candle completely engulfs the previous one and represents the change in the sentiment.
How accurate is Bullish Engulfing?
It’s hard to say how accurate the Bullish Engulfing pattern is. The pattern works best in calp and less volatile markets. To find out exactly how accurate it can be, you can always use the historic data and backtest the strategy. Keep in mind that the pattern works better in larger time frames. Less than 1 hour time frame can produce a lot of false signals thanks to market noise.