Understanding Bearish & Bullish Engulfing in Candlestick Analysis

What Is an Engulfing Pattern?

Engulfing is a candlestick formation where a candle completely covers the body of the previous candlestick (wick/shadow not included in the calculation). This pattern is a significant momentum reversal signal and is often used by traders to identify trend reversals.

Basic Conditions for Forming an Engulfing Pattern

To recognize an engulfing pattern, two main requirements must be met. First, there must already be a clear trend, either upward or downward. Second, there should be at least two candlesticks with specific formations indicating a reversal signal.

Without an established prior trend, this pattern will not appear or will not serve as a valid trading signal.

Bearish Engulfing - Reversal Signal from Uptrend to Downtrend

A bearish engulfing candle forms when in a bullish trend. The first candle has a small green body (bullish), followed by the next candle with a red body (bearish) that completely engulfs the previous green candle.

To confirm a valid bearish engulfing pattern, observe the following criteria:

1. The length of the red candle’s body must be larger than the previous green candle’s body
2. The low level of the red candle must be lower than the low of the previous green candle
3. The close level of the red candle ideally should be below the low of the previous green candle (although this is not an absolute requirement)

Bullish Engulfing - Reversal Signal from Downtrend to Uptrend

The bullish engulfing pattern appears during a bearish trend phase. Here, the first candle shows a small red body (bearish), followed by the next candle with a green body (bullish) that completely engulfs the red candle.

The criteria for validating a bullish engulfing candle are:

1. The length of the green candle’s body must be longer than the previous red candle’s body
2. The high level of the green candle must surpass the high of the red candle
3. The close level of the green candle should be above the high of the red candle (although this is not mandatory)

Both patterns are important tools for traders to determine entry or exit points by observing signs of market sentiment change.