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What is a Bullish Engulfing Pattern and how does it work?
The Bullish Engulfing Pattern is a bullish reversal candlestick that forms after a decline in price.
Here’s how to recognize one:
- The first candle has a lower close
- The body of the 2nd candle “covers” the body of the first candle
And here’s what a Bullish Engulfing Pattern means…
- On the first candle, the sellers are in control as they pushed the price lower for the session
- But not long after, the buyers stepped into the market and push the price higher (and overwhelm the previous selling pressure)
One more thing…
A Bullish Engulfing candlestick and Hammer are essentially the same. It all depends on the timeframe you’re looking at.
If the 2-hour timeframe forms a Bullish Engulfing Pattern, then the candlestick pattern on the 4-hour timeframe will be a Hammer.
Here’s what I mean…
In essence, a Bullish Engulfing Pattern (or Hammer) tells you the buyers are in control for now.
But whether they are likely to remain in control depends on the context of the market (more on that later).
Don’t make this common mistake when trading the Bullish Engulfing Pattern…
“Look. It’s a Bullish Engulfing Pattern. This is a sign of strength, let’s buy!”
Next thing you know, the market reverses and you get stopped out for a loss.
Because the truth is, a Bullish Engulfing Pattern is usually a retracement in a downtrend.
Let me give you an example…
Bullish Engulfing Pattern on the Daily timeframe:
On the lower timeframe, it’s a retracement against the trend…
See my point?
So yes, a Bullish Engulfing Pattern signals the buyers are momentarily in control.
But if the long-term trend is down, then it’s likely the sellers will regain control and push the price lower.
So now the question is, how should you trade the Bullish Engulfing Pattern?
Well, that’s what you’ll discover next. Read on…
Bullish Engulfing Pattern: The MAEE Formula
The MAEE Formula stands for:
- Market Structure
- Area of value
- Entry trigger
1. Market Structure
The first thing you want to do is identify the current market structure.
Is it in an uptrend, downtrend, or range?
2. Area of value
Then, you want to identify the area of value so you know where potential buying/selling pressure could step in.
3. Entry trigger
Next, you need a valid entry trigger to get you into the trade.
This is where candlestick patterns are useful because it tells you who’s in currently control (whether it’s the buyers or sellers).
For example, a Bullish Engulfing Pattern tells you the buyers are in control for now.
Finally, you must decide where to exit your trade if the price move in your favour, or against you.
In other words, where’s your stop loss and target profit?
I know this is a lot to digest, so let me give you a few examples of The MAEE Formula…
MAEE Formula winning trade on USDCHF 4-hour:
MAEE Formula winning trade on EURCAD daily:
MAEE Formula losing trade on GBPAUD daily:
Now, I’ve not discussed exits because it requires an entire blog post on it.
If you want to learn more, these resources will help…
How to use the Bullish Engulfing Pattern to catch market bottoms with precision
Besides using the Bullish Engulfing Pattern as an entry trigger, it can also alert you to potential trend reversal trading opportunities.
Here’s the idea behind it…
As you know, a Bullish Engulfing Pattern signals the buyers are momentarily in control.
So, when this pattern occurs on the higher timeframe (like Weekly) and leans against an area of value (like Support), that’s a signal the market is likely to reverse higher.
But here’s the thing:
You might not want to trade the Weekly timeframe because it requires a large stop loss.
Go down to a lower timeframe and time your entry.
So, here’s how it works…
- Identify a Bullish Engulfing Pattern that leans against an area of value on the Weekly timeframe
- Go down to the Daily or 8-hour timeframe and look for bullish chart patterns (like Bull Flag, Ascending Triangle, etc.)
- Trade the breakout of the bullish chart pattern
Here’s an example…
Bullish Engulfing on EURGBP weekly:
Potential bull flag pattern on EURGBP daily:
You use this concept for other Candlestick Patterns as well like Shooting Star, Hammer, etc.
2 things you must look for when trading the Bullish Engulfing Pattern…
- Strong momentum move coming into an area
- Strong price rejection
1. Strong momentum move coming into an area
Let me ask you…
If you buy at Support, do you prefer the nearest swing high (or Resistance) to be near, or far away?
You want it to be far away so your trade has a greater profit potential (before selling pressure steps in).
And how do you find such trading opportunities? After a strong momentum move into Support.
Here’s an example:
Strong momentum move into Support
However, if you get a “stair-stepping” move into Support, the price will encounter selling pressure shortly after the rally (at the nearest swing high).
Here’s what I mean…
Stair stepping move into Support
So if you trade reversals, always look for a strong momentum move into an area.
The bigger and bolder the candles, the better.
2. Strong price rejection
Here’s the thing…
Not all Bullish Engulfing Patterns are created equal.
As you’ve seen earlier, a Bullish Engulfing Pattern is usually a retracement against the downtrend (on a lower timeframe).
This is especially true if the size of the candle is small or of similar size to the earlier candles.
But if the range of the Bullish Engulfing Pattern is larger than the earlier candles, then it signals strong buying pressure.
Also, if you look at the lower timeframe, you’ll likely see a break of structure as the price makes a higher high and lows (another sign of strength from the buyers).
Here’s an example of a strong price rejection…
If the Bullish Engulfing Pattern is at least 1.5 times ATR, then it’s likely to be a strong price rejection. This is one way to quantify a “strong” price rejection.
So here’s what you’ve learned today:
- A Bullish Engulfing Pattern signals the buyers are temporarily in control
- The MAEE Formula which stands for Market structure, Area of value, Entry trigger, and Exits
- The Bullish Engulfing Pattern can serve as an entry trigger
- To identify high probability reversals, you want a strong momentum coming into Support and a strong price rejection
Now here’s what I’d like to know…
How do you use the Bullish Engulfing Pattern in your trading?
Leave a comment below and share your thoughts with me.