A bullish engulfing pattern is a reversal candlestick pattern. The reversal candlestick patterns are the chart patterns which indicate an end to existing short term trend and start of a new trend in security prices.
The bullish engulfing pattern forms when a downtrend in stock prices is in force already. You may see it as a continuation pattern also. This happens when it forms in an on-going uptrend.
Bullish engulfing pattern is a bullish signal for stock prices. It means stock prices are likely to move higher in very short-term.
Formation of Bullish Engulfing Pattern
This chart 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. This is because of bearish environment in stock markets.
Prices continue to move further lower. Then the buyers or the Bulls step in. Buyers start pulling the stock price higher. This leads to a close above the previous day opening price.
If you see in the above image, we have a typical bullish engulfing pattern. The stock was in downtrend. The prices were coming lower when the price was halted by a bullish candlestick. After that the stock price starts rising again. The bigger the engulfing candlestick, the more forceful the reversal can be.
You should also look at the volume of the trades on the day of formation of bullish candlestick patterns. Higher volume indicates the more traders participation. More volume indicates likelihood of the pattern to be successful.
Sometimes opening or closing prices for both of these days may be same. At that time, 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.
How to Trade Bullish Engulfing Pattern?
To trade these candlestick chart patterns, 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 be too deep and so greater 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.
After that downside, it starts its up move towards higher resistance.