Bullish engulfing pattern is one of the most popular candlestick patterns among the variety of financial technical analysis tools available to assess the performance of your stocks.
If you are keen on exploring stock performance, then you may have already studied the high, low, open and close data points of candlestick patterns for the synthesis of multiple time frames. In case you haven’t, here’s a quick graphical representation of the basic candlestick pattern.
Figure 1: Candlestick Pattern Basics
That said, let’s now iterate the importance of the context of interpreting candlesticks. In the bullish engulfing pattern, you are likely to see agreen candle engulfing the red candle that precedes it. The red candle of the preceding day represents selling in limited volumes.
In this case, the dominating bearish trend is overcome by the bullish pattern on the next day, giving way to a strong buying force.
Bullish Engulfing Pattern – How to Use?
Bullish engulfing is helpful when you are looking for stock reversals. It depicts a sign of stocks moving up, after a period of sluggish bearish runs.
The red bar accompanies a negative stock market sentiment, and the engulfing green bar of the bulls pulls the stocks up higher with many more buyers stepping in. In short, the large bullish candle engulfing the preceding low-lying bearish pattern is an attempt to provide thrust for growth even when the stock market is at its rock-bottom.
The following figure shows a hypothetical example of a bullish trend.
Figure 2: Bullish Engulfing Pattern
Bullish engulfing means a lot to the strategic stock market trader.
You may combine several statistical tools with the Bullish engulfing pattern to find a viable conclusion for trading your stocks with success. Some of these tools are stochastics, moving average convergence divergence (MACD), and Bollinger bands.
Stochastics help to improve the accuracy of your trading decisions when a bullish trend comes up.
MACD is very helpful to determine trading decisions when a bullish trend emerges as it helps understand crossover of moving averages and the reliability and strength of stock signals.
Bollinger pattern helps to discern the volatility and trend inherent in stocks.
Bullish engulfing patterns are interpreted in different ways by stock market traders. While some traders believe that the tails of candlesticks must be included in the analysis of stock decisions, others think that a bullish engulfing pattern is valid even when the tails are not engulfed.
Whatever the interpretation of the case in point may be, more market traders are inclined towards buying as opposed to selling a specific stock instrument when this situation arises.
Another important aspect you may find useful while interpreting bullish engulfing patterns is that it is possible for more than a single candle to engulf the preceding red candle in this arrangement. This means that a single red candle may be followed by two, three, or even four green candlesticks of varying length, all forming a part of the bullish candlestick pattern.
This combination of candlesticks is still considered to engulf the single preceding red candlestick as long as the body (and tails) is fully covered by its green counterparts.
Bullish engulfing pattern presents useful signals for stock traders. A stock trading professional may choose to buy stocks immediately, or at the end of the second day, which is right after the reversal of market sentiment.
Alternatively, the trader may choose to wait for another day to confirm that the sentiment persists. Bullish patterns may be used by conservative stock traders as well who prefer to wait until the next signal which is a convincing reason to proceed with a buy order.
Bullish Engulfing Patterns – Shall You Use Them?
The bullish engulfing pattern could prove challenging for decision-making during stock trading as the pattern may look different on two dissimilar timeframes. This means that a stock trader may have difficulty attributing a certain level of confidence to trading decisions executed on the basis of this pattern.
Traders may sometimes find it more meaningful to evaluate a group of candlesticks as opposed to a single instance and implement their final decisions accordingly.
Risk management for stock traders may be particularly challenging when using the bullish candlestick patterns. As mentioned above, this risk may be overcome when the pattern is interpreted against benchmarks in statistical analysis tools.
In other words, it may be risky to subjectively assess the validity of signals in a bullish trading pattern on the basis of graphical candlestick charts alone. However, when the behaviour of these patterns is combined with statistical analysis tools, stock traders are at an advantage of proactive decision-making for achieving success with their trading strategy.
The most successful stock trading decisions are based on observing the right signs when a flip over happens as a bullish engulfing pattern starts to unfold. Traders are advised to be especially careful when interpreting bullish engulfing patterns when significant size differences occur in the candlesticks for the first and second day.
Specific instances that hold importance for stock traders include occurrences of high volume, major downtrends or up trends, or when the real body of the candle for the first and second day engulfs the shadows and body of the first day.
Bullish Engulfing Pattern – Conclusion
In effect, the bullish engulfing pattern is an important indicator of reversal of the dynamics of stock markets. Irrespective of your stock trading style, it presents a viable evidence for your stock trading decisions.
Both liberal and conservative traders may combine bullish patterns with statistical analysis to accurately make sense of complete reversal in investor sentiments.
Observing specific signs with respect to trends increases the significance of the bullish engulfing trading pattern. The pattern is significant to stock analysts who study the viability of a buy decision in light of its increasing momentum and robustness.
Stock analysts must combine technical tools with past experience to arrive at a buy decision after detecting a sentiment reversal triggered by a bullish engulfing pattern. In this way, bullish engulfing patterns can be employed in the form of essential clues for successful stock trading.
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