The bullish engulfing bar is one of my personal favorites among all candlestick patterns. I prefer being a bull, buying low and selling high instead of trying to short assets, so I’m always on the lookout for this trend reversal signal to initiate entry points for trades.
Even though the bull engulfing bar is one of the most powerful candle patterns you can use to make entry and exit points, you should still use other indicators such as levels of resistance and support to help guide your trading decisions. Simply seeing the signal show up by itself may be a false indicator. This guide will teach you how to analyze bullish engulfing bars to make actionable trading decisions.
This pattern analysis is part of a much larger training series that will teach you everything you need to know to successfully trade candlestick charts. Make sure you take a look at the complete guide here: Japanese Candlestick Chart Analysis.
Bull Engulfing Bar Pattern
You should be on the lookout for a bull engulfing bar candle pattern when the market is in a general uptrend on 4 hour or daily timeframes. Short time frames are never recommended for use with candlestick patterns to make trading decisions – they will throw too many false signals. Never try to fight the overall trend of the market with your trades. It’s also possible to trade this pattern during sideways markets, but you must heavily rely upon support and resistance levels to do so.
This pattern is used to make entry and exit points in the market. During downtrends, you can use the appearance of this indicator to exit short positions. For an uptrend, you can initiate long positions when this signal shows up. As a result, this is a pattern that can potentially show up and be used during any market conditions, which is why it’s one of my favorites and one of the most powerful candlesticks.
The opposite of the bullish engulfing bar is the bear engulfing bar. Keep an eye out for that pattern during market downtrends. A combination of usage of the two engulfing bars is perfect for use in swing trading.
Bullish Engulfing Basics
This candlestick pattern contains two candles. The first is a short, bearish candle. The second candle will be bullish and often much longer. To qualify as a match for this pattern, you need the shorter bear candle to be completely covered or engulfed by the longer bull candle.
You’re looking for the pattern to make an appearance at the end of a downtrend, signifying a trend reversal in the market price action. However, you cannot use this signal alone to make trade decisions. Later in this guide I will be talking about a few methods you can use to trade the bullish engulfing bar pattern that combine it with other indicators to make more accurate trades.
Like the bear engulfing bar, the bullish version can also have more than one shorter candle that is covered, but the requirement is for at least one candle to be engulfed. A much larger long candle can sometimes indicate a more powerful shift in the upcoming price action, but this doesn’t always hold up. The long candle can potentially barely cover the shorter one and still lead to a very profitable trade.
Trader Emotional Analysis
How do you interpret the emotional state of traders when you see the bull engulfing bar? Sellers previously had control of the market and were driving prices down. When a bear candle gets engulfed by the following bull candle, it tells you that sellers are giving up or being overpowered.
Buyers are now beginning to take over, so they have successfully flipped the short-term market trend against the bears. Prices will begin to rise again after this signal when other market conditions are set for a price increase.
This seller capitulation is often the perfect opportunity to open a long position, but I also highly recommend using other indicators to verify the trend reversal before placing an order. In the next section I will be going into more detail about how to use this pattern to initiate trades and how to combine it with other signals to boost your accuracy.
How to Trade the Bull Engulfing Bar
The bullish engulfing bar trades the opposite of the bearish bar. Take a look at the example below…
You can actually see four bull engulfing bars in this illustration. Note the overall trend of the market is increasing in price, so you’re not trying to fight the overall market trend. Within that upward price action, the price will swing up and down. This pattern will let you know potential areas where the temporarily downward swinging price is likely to reverse and begin to rise again. That makes this the perfect trading system to use for long positions and day trading as a bull.
Trading Lines & Levels
One of the indicators you can use along with this candlestick formation to confirm a good trade is support or resistance lines. Short-term price action will often bounce between the levels of local resistance and support. You simply need to identify these levels. Initiate trades when the price hits them, and the candle pattern shows.
Trend lines drawn across highs and lows on your chart can also offer easy entry and exit points when combined with the bullish engulfing bar. The same can also be said for moving averages too. All of these lines and levels are common levels of support and resistance that will contain short-term price action.
Yet another level you can utilize as an indicator is supply and demand. Take a look at both supply and demand on a 4 hour or daily timeframe. These levels will often give you a very clear indication of a swing range where the price action is very likely to be contained. Simply wait for the price to drop down to a demand level, and then enter a long position when the bull engulfing bar shows up. When the price goes up towards the supply level and a bearish engulfing bar or another trend reversal signal appears, exit your position to take profits. This trade can often be repeated numerous times every day, making it a favorite that I’ll continue to use for many years.