Trading the Bullish and Bearish Engulfing

Bullish Bearish Engulfing

There are dozens of bearish and bullish reversal patterns. We have elected to narrow the field by selecting a few of the most popular patterns for detailed explanations: the engulfing pattern. 

Engulfing Pattern

A reversal candlestick pattern that can be bearish or bullish, depending upon whether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body and closes in the opposite direction of the trend. This pattern is similar to the outside reversal chart pattern but does not require the entire range (high and low) to be engulfed, just the open and close.

Bullish Bearish Engulfing

Continue reading about engulfing patterns or start playing around in a ​risk-free demo account and notice how bullish and bearish engulfing work in real-time.

Bullish Bearish Engulfing

Bullish Engulfing

The bullish engulfing pattern consists of two candlesticks, the first black and the second white. The size of the black candlestick is not that important, but it should not be a Doji pattern which would be relatively easy to engulf. The second should be a long white candlestick – the bigger it is, the more bullish. The white body must totally engulf the body of the first black candlestick. Ideally, though not necessarily, the white body would engulf the shadows as well. Although shadows are permitted, they are usually small or nonexistent on both candlesticks.

After a decline, the second white candlestick begins to form when selling pressure causes the security to open below the previous close. Buyers step in after the open and push prices above the previous open for a strong finish and potential short-term reversal. Generally, the larger the white candlestick and the greater the engulfing, the more bullish the reversal. Further strength is required to provide bullish confirmation of this reversal pattern.

Bullish Confirmation

Patterns can form with one or more candlesticks; most require bullish confirmation. The actual reversal indicates that buyers overcame prior selling pressure, but it remains unclear whether new buyers will bid prices higher. Without confirmation, these patterns would be considered neutral and merely indicate a potential support level at best. Bullish confirmation means further upside follow-through and can come as a gap up, long white candlestick or high volume advance. Because candlestick patterns are short-term and usually effective for only 1 or 2 weeks, bullish confirmation should come within 1 to 3 days after the pattern.

Bearish Engulfing

The bearish engulfing pattern consists of two candlesticks: the first is white and the second black. The size of the white candlestick is relatively unimportant, but it should not be a doji, which would be relatively easy to engulf. The second should be a long black candlestick. The bigger it is, the more bearish the reversal. The black body must totally engulf the body of the first white candlestick. Ideally, the black body should engulf the shadows as well, but this is not a requirement. Shadows are permitted, but they are usually small or nonexistent on both candlesticks.

After an advance, the second black candlestick begins to form when residual buying pressure causes the security to open above the previous close. However, sellers step in after this opening gap up and begin to drive prices down. By the end of the session, selling becomes so intense that prices move below the previous open. The resulting candlestick engulfs the previous day's body and creates a potential short-term reversal. Further weakness is required for bearish confirmation of this reversal pattern.

Bearish Confirmation

Bearish reversal patterns can form with one or more candlesticks; most require bearish confirmation. The actual reversal indicates that selling pressure overwhelmed buying pressure for one or more days, but it remains unclear whether or not sustained selling or lack of buyers will continue to push prices lower. Without confirmation, many of these patterns would be considered neutral and merely indicate a potential resistance level at best. Bearish confirmation means further downside follow-through, such as a gap down, long black candlestick or high volume decline. Because candlestick patterns are short-term and usually effective for 1-2 weeks, bearish confirmation should come within 1-3 days.

Limitations of Using a Bearish Engulfing Pattern

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 candlestick pattern. The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don't provide a price target. Instead, traders will need to use other methods, such as technical indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

Final notes on Bullish and Bearish Engulfing

To be considered a bullish reversal, there should be an existing downtrend to reverse. A bullish engulfing at new highs can hardly be considered a bullish reversal pattern. Such formations would indicate continued buying pressure and could be considered a continuation pattern. 

  • A bullish engulfing pattern is a candlestick chart pattern that forms when a small black candlestick is followed the next day by a large white candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
  • Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks.
  • Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks.


To be considered a bearish reversal, there should be an existing uptrend to reverse. It does not have to be a major uptrend, but should be up for the short term or at least over the last few days. A dark cloud cover after a sharp decline or near new lows is unlikely to be a valid bearish reversal pattern. Bearish reversal patterns within a downtrend would simply confirm existing selling pressure and could be considered continuation patterns.
 

  • A bearish engulfing pattern can occur anywhere, but it is more significant if it occurs after a price advance. This could be an uptrend or a pullback to the upside with a larger downtrend.
  • Ideally, both candles are of substantial size relative to the price bars around them. Two very small bars may create an engulfing pattern, but it is far less significant than if both candles are large.
  • The real body—the difference between the open and close price—of the candlesticks is what matters. The real body of the down candle must engulf the up candle.
  • The pattern has far less significance in choppy markets.

Understanding how to read an engulfing pattern is important, but if you want some help, MT5 AM Broker offers a useful Candlestick toolkit and our trainers can provide you the right guidance. Play around in a ​forex demo account and notice how bullish engulfing and bearish engulfing can make you serious money.

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