Bullish and bearish engulfing candlestick patterns are a key part of technical analysis and one of the most common reversal indicators adopted by traders.
Generally, a candlestick is a type of chart that displays the open, high, low, and close prices of a particular stock.
Similarly, a reversal relates to the change or turnaround in the price of a stock or an asset, which can occur to the upside or downside.
At the same time, engulfing pattern or engulfing candlestick pattern is a technical chart pattern, which highlights a potential reversal in the current market trend. Engulfing patterns could either be bearish or bullish. This is as per the previous price action and depends on where the engulfing patterns appear with recent trend lines and support as well as resistance levels.
Engulfing patterns comprise two bars on a price chart. The second candlestick will be much larger than the first in such a way that it completely covers or engulfs the length of the previous bar.
A bullish engulfing pattern is formed in a downward trend. Ideally, the bullish engulfing candle is formed when the share opens lower than the previous trading session and closes higher than the previous close.
A bullish engulfing pattern reverses the ongoing trend as more buyers enter the market. This leads to the movement of the prices up further.
Ideally, the bullish engulfing pattern involves two candles. In this case, the second green candle tends to completely engulf the body of the previous red candle.
On the other hand, a bearish engulfing pattern is the opposite of a bullish engulfing pattern, which appears in an uptrend. The share price goes on moving up to a point where a big bearish candle engulfs the previous bullish candles.
It highlights a reversal of the uptrend and indicates a fall in prices by sellers who are known to exert selling pressure when it appears at the top of an uptrend.
This pattern triggers a reversal of the ongoing trend as more sellers enter the market resulting in the fall of prices.
In a bearish engulfing pattern, the colour of the first candle is usually green or white, which indicates a bullish move. At the same time, the colour of the second candle is usually red or black, this highlights a bearish move.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.