There are different types of candlestick chart patterns exists but in this article, we will talk about engulfing candlestick pattern. An engulfing candlestick pattern, we have both bullish and bearish. But as the discussion go too long to describe, then we will talk only about bullish engulfing in this article.
What Is An Engulfing Candlestick?
Engulfing candles tend to signal a reversal of the current trend in the market. This specific pattern involves two candles with the latter candle ‘engulfing’ the entire body of the candle before it. The engulfing candle can be bullish or bearish depending on where it forms in relation to the existing trend. The image below presents the bullish engulfing candle.
A bullish engulfing pattern is a white candlestick that closes higher than the previous day’s opening after opening lower than the previous day’s close. It can be identified when a small black candlestick, showing a bearish trend, is followed the next day by a large white candlestick, showing a bullish trend, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
Also Read: Let’s know about “Triangle Chart Patterns” — A Brief Discussion
Understanding a Bullish Engulfing Pattern
The bullish engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows.
This pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle. On the second day of the pattern, the price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers.
Example of a Bullish Engulfing Pattern
As a historical example, let’s consider Philip Morris (PM) stock. The company’s shares were a great length in 2011 and remained in an uptrend. In 2012, though, the stock was retreating.
On January 13, 2012, a bullish engulfing pattern occurred; the price jumped from an open of $76.22 to close out the day at $77.32.1 This bullish day dwarfed the prior day’s intraday range where the stock finished down marginally. The move showed that the bulls were still alive and another wave in the uptrend could occur.
Limitations of Using Engulfing Patterns
A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend; however, they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.
The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.
The Bottom Line
The more you understand the chart pattern, the more you will capable of analyzing the market trend. Also, finding the best forex no deposit bonus will be a great benefit to those traders who do not have a sufficient amount of capital. And a good broker must be included.