David Waring

In our last lesson we looked at two candlestick patterns which represent an indecisive moment in the market and can also represent a potential trend reversal when seen during an uptrend or downtrend in the market and are known as the spinning top and doji candlestick patterns. In today’s lesson we are going to look at two more candlestick patterns which also can represent potential reversals which are known as the Bullish and Bearish Engulfing Patterns.

The Bullish Engulfing Pattern

The Bullish Engulfing pattern is another candlestick formation which represents a potential reversal in the market when seen in a downtrend. The pattern is made up of a white and black candle where the latest candle (the white candle) opens lower than the previous candle’s (the black candle) close and closes higher than the previous candle’s open. When this happens the current period’s white candle completely engulfs the body previous period’s black candle.


Unlike the Spinning Top and the Doji we learned about in the last lesson, the Bullish Engulfing Pattern represents not indecision in the market, but a situation where the control has shifted from sellers to buyers. The long body of the current candle completely engulfing the body of the previous candle to the upside is representative that the buyers have not only taken control, but have taken control with force. As such, when this pattern is seen during a downtrend in the market it is seen as a potential sign that the trend may be reversing.


There are several instances where traders will normally see greater potential for a reversal which are:

• The longer the white candle and the smaller the black candle which precedes it the greater the potential for reversal
• When the white candle completely engulfs the black candle that precedes it
• When there is large volume during the period in which the white candle forms

The Bearish Engulfing Pattern


The Bearish Engulfing Pattern is a Mirror Image of the Bullish Engulfing Pattern so the same rules apply, just in reverse. The Bearish Engulfing pattern when seen in an uptrend is representative of a potential reversal of that trend. The pattern is made up of a white and black candle where the latest candle (the black candle) opens higher than the previous candle’s (the white candle) close and closes lower than the previous candle’s open. When this happens the current period’s black candle completely engulfs the body of the previous period’s white candle.


There are several instances where traders will normally see greater potential for a reversal which are:

• The longer the black candle and the smaller the white candle which precedes it the greater the potential for reversal
• When the black candle completely engulfs the white candle that precedes it
• When there is large volume during the period in which the white candle forms

Other Links to Help You Learn About Bullish and Bearish Engulfing Candlestick Patterns

Bullish Engulfing and Bearish Engulfing Candlesticks -- Technical Analysis Education
Candlestick Engulfing Patterns - Bullish and Bearish Engulfing candlestick charts
the bullish engulfing pattern
Bearish Engulfing Japanese Candlestick Chart

That completes our lesson for today. In tomorrow’s lesson we are going to learn about two more candlestick patterns which are also potential reversal patterns known as the hammer and the hanging man candlestick patterns so we hope to see you in that lesson. As always if you have any questions or comments please feel free to leave them in the comments section below so we can all learn to trade together, and have a great day!

rocketman7

David,
Hey - great site. I'm really enjoying working through the lessons and becoming "informed."

Just to digress and argue semantics, the bearish engulfing pattern really isn't a mirror image of the bullish engulfing pattern (and I suppose vice versa). It would be a negative image because the colors of the candles change.

Again, great site and I appreciate all the work you've put into it.

David Waring

Hey Rocketman7,

Glad you like the site and that you are hopefully making more "informed" trades from some of the info on the site.

Good call on the mirror image bit I am glad someone was paying close enough attention to find the error;-)....will fix it up in the next edition of the lessons.

Best Regards,
Dave

jerome2900

I luv this lesson... those bullish and bearish engulfing candlesticks were easy to spot.

David Waring

Hi Jerome2900,

Thanks for the comment I am glad you like the lesson and welcome to the community.

Best Regards,
Dave

Navneet Pandey

Hi David!
I am very very impressed with the kind of platform you have created for like minded trades. It's just majestic to offer such a service that too free.
I congratulate and thank you from deepest of my heart for such a great effort of you and your team.
David, I have few doubts from this video section. It would be great if you clear them.
Q1."There are several instances where traders will normally see greater potential for a reversal which are:
* When there is large volume during the period in which the white candle forms. "
Can you emphasize this last sentence a bit more?

Q2. I cannot hear clearly what you said in between 4:54 and 5:04 according to youtube counter. So it would be great if you kindly write it down for better understanding.

Thanks in advance and keep rocking this community!

David Waring

Hi Navneet,

Welcome to the community and thank you for the kind words I am glad you like the site.

In a bullish engulfing pattern, if the white candle which is the second candle in the pattern is accompanied by high trading volume then traders will generally place more emphasis on the pattern and give the market a higher probability of reversing.

The text for each of my videos is directly below each video on the site so you can follow along there if you have any troubles with the audio.

Hope that helps. If there are any other questions or comments please feel free to post as always.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

DMD

Hi David

Do you try to be an expert in certain signals/indicators or a master of all ?

Lets say I have a watch list of stocks I know that are trading sideways close to or near support (keep on top of the fundamentals so I don't get blindsided) and monitor them
Then notice a bullish engulfing pattern with an increase in volume . Then enter a position ( a reasonably tight stop loss at or just below support )
With a good exit strategy
Is this along the lines of what I should be looking for as a personal trading strategy .
It seems if I focused on mastering certain things and waiting I could increase my probability of success, while minimizing the downside

Thanks , and tear apart any idea I have if it needs it thanks in advance

Tekmnd

Hi DMD

You seem off to a good start, but there are a couple of things you should consider adding.

You should determine a risk amount per trade. Many traders use 1% or 2%.
When you determine the location for your stop, calculate out how much per share you would lose if you were stopped out. The calculate out a position size (how many shares to buy) so that is you are stopped out, your maximum loss is that risk amount.

You should develop a stop strategy of more than just placing it below support. An idea would be to include the Average True Range (ATR) tool here, but there are other methods as well.

You should determine an exit strategy. How do you know when to exit the trade?

"Do you try to be an expert in certain signals/indicators or a master of all ?"

I would say that your goal should be to try and be an expert at trading, and think of signals and indicators as just one tool to help you achieve this.

Cheers
Tek

DMD

Thanks Tek ,and

Thanks for the site I know I have only got my feet wet but am grateful for the conduit to knowledge