A Bullish Engulfing Candlestick Pattern is usually a reversal pattern.It forms and is more effective when a downtrend in stock prices is in force already,although you may see it as a Continuation Pattern also when it forms in an on-going uptrend.Bullish Engulfing Candlestick Pattern forms when the body of a Green Candlestick overlaps or engulfs the body of prior day Red Candlestick.On the day of formation of this pattern,the prices open lower than previous day close because of bearish environment in stock markets.Prices continue to move further lower.Then the buyers or the Bulls step in and start pulling the price higher and give a close above the previous day opening price.
If you see in the above image,we have a typical Bullish Engulfing Candlestick Pattern.Stock was in downtrend and the prices were coming lower when the price was halted by Bullish Candlestick and after that the stock starts rising again.The bigger the Bullish Engulfing Candlestick,the more forceful the reversal can be.
You should also look at the Volume of the trades on the day of Bullish Engulfing Candlestick formation.Higher Volume indicates the more traders participation and the more likelihood of the pattern to be successful.
Sometimes opening or closing prices for both of these days may be same and it doesn’t look like Engulfing Candlestick.It is okay but it should be only one of them,either opening or closing,but not both.
To trade this pattern,your tendency should be to buy the stock near the middle of the Bullish Candlestick.If you buy the stock near top of it,your stop loss shall get widened and so is your risk.Stop loss for the trade is at the lowest point of this pattern.In above example,your stop loss should be just below the lower shadow of Bullish Candlestick.
We also see in the above image that waiting for lower prices to enter in the stock yields its dividend.The stock gives chance to enter at lower prices few days later than the Engulfing Candlestick forms and then starts its up move towards higher resistance.