Definition
Bullish Engulfing formation consists of two candles: A black candle with small body and a white candle with large body, covering the whole body of the black candle. The market is in a downward trend. The white candle is not supposed to include the shadows of the black one, but the whole body must be covered. Bullish Engulfing formation forecasts an upcoming ascending trend, signalling a trend reversal.
- Trend: Reversal
- Expected trend: Bullish
- Previous trend: Bearish
- Reliability: High
- Type: Bullish
- Number: 2
Recognition
- The market is in a downward trend.
- The first day is a short black candle.
- The second day is white candle with large body, covering the whole body of the black candle.
Interpretation
It forms during inclining trends. The white candle on the second day must cover the whole body of the black candle. It gives more reliable signals in short term, if the next day is a white, increasing day. The formation does not give reliable signal by itself. Changes in the trading volume can help to make decisions. If the volume is larger for the black candle than its previous day’s volume, the pattern gives a highly reliable long signal.
Important factors
The relative size of the two candles’ bodies is highly important. The strength of the trend is decreasing if the first candle’s body is very small (Doji) and the second candle’s body is very large. The imbalance between the two candle bodies shows that the market is going to turn into ascending. The probability of a trend reversal is higher, if the volume on the second day is higher or if the second day’s candle covers more previous days (if there are more small, black candles before the white one). A verification of the upcoming reversal is needed from another source. The confirmation could come from a white candle with an upward gap or a higher closing price.
