Learn Bullish Engulfing Candlestick Patterns

BULLISH ENGULFING PATTERNS

Let’s review. The bullish engulfing pattern is a reversal pattern formed in downtrending stocks and often signals a short term reversal or bounce in the stock price. The first candlestick in this two day pattern has a black body, indicating the bearish downtrend is still intact. Black bodies indicate the stock closed down for the day. The second candlestick has a white body extending below the first day’s body, indicating the stock gapped down at the open. The lower end of a black body is the day’s closing price and the lower end of a white body is the day’s opening price. Thus, when the second day’s white body engulfs or covers the first day’s black body, the price gaps down in the morning, indicating more bearishness. It then reverses to close above the previous day’s opening, indicating a reversal in sentiment for the second day. This often continues in the short term.

Figure 2.1 shows a bullish engulfing candlestick pattern that developed in CYBX on 05/19/06. CYBX had been in a three-week downtrend, which fulfills the first requirement for the pattern. The first day of this two day pattern was the black-bodied candlestick on 05/18/06. The black body indicated a down day for CYBX, which was a continuation of the current downtrend. The next day was a white-bodied  candlestick (marked by the up arrow) in which both the upper and lower ends of the candlestick body overlap or engulf the body of the previous day’s candlestick.

FIGURE 2.1: CYBX BULLISH ENGULFING PATTERN OF 5/19/06

The bullish engulfing pattern marked the end of the downtrend for CYBX and, during the next five trading sessions, it ran up nearly 30%. A 30% profit in a few days helps keep food on the table, but traders need to know more than just whether a pattern has worked. They need to know how reliable it is—how often it works.

Figure 2.2 shows a bullish engulfing pattern that occurred in GHL during a three-week downtrend. The pattern occurred on 06/01/06 and is marked by an up arrow in Figure 2.2. If a trader had entered a long position the day after the bullish engulfing pattern formed, he or she would have seen a 10 point loss during the next six sessions.

FIGURE 2.2: GHL BULLISH ENGULFING PATTERN OF 6/01/06

If trading patterns worked all the time, trading would be easy and everyone would be doing it. We have all seen marketing pieces promising secret knowledge of a super trading system that offers 1,000% returns. The truth is there are no trading systems producing a reasonable number of trades that win all the time in the long run. One of the tricks to trading is to have a variety of trading patterns that work most of the time and to know how to select the best patterns for the current market conditions. Candlestick patterns provide a number of opportunities along these lines.

Definition is the first step in unlocking the secrets of trading bullish engulfing patterns; let’s review the bullish engulfing pattern.

BULLISH   ENGULFING PATTERN-STANDARD DEFINITION

• The stock must be in a downtrend.
• The first day of the pattern must be a black body candlestick.
• The second day of the pattern must be a white body candlestick.
• The second day’s open must be less than the first day’s close.
• The second day’s close must be greater than the first day’s close.