To The Moon

This is the third part of a series which will show how we can use candlestick to identify bullish signal.

You can refer to the previous parts here:

Part 1/11 - How to use [Hammer Candlestick Chart] to identify Bull market

Part 2/11 - How to use [Inverse Hammer Candlestick Chart] to identify Bull market

Do remember that we should never use candlestick chart alone when we trade, we also need to look out for other indicators which we are comfortable with.

In this part, I will be sharing Bullish Engulfing Bullish Signal.

Here is a recap on what is a Bullish Candlestick Patterns

Bullish Candlestick Patterns

Over a period of time, there will be groups of daily candlesticks fall into recognizable patterns with descriptive names like three white soldiers, dark cloud cover, hammer, morning star, and abandoned baby, these are just a few of the many examples.

Patterns form over a period of one to four weeks and are a source of valuable insight into a stock’s future price action.

But it is important to understand the 2 principles before we go into details of each individual bullish candlestick patterns.

Here are the 2 principles you may wish to understand.

1. Bullish reversal patterns should form within a downtrend. Otherwise, it’s not a bullish pattern, but a continuation pattern.

2. Most bullish reversal patterns require bullish confirmation. In other words, they must be followed by an upside price move which can come as a long hollow candlestick or a gap up and be accompanied by high trading volume. This confirmation should be observed within three days of the pattern.

Bullish Reversal Patterns

As mentioned in the 2 principles, the bullish reversal patterns can be further confirmed through use of other traditional technical analysis, like trend lines, momentum, oscillators, or volume indicators. This can be done to reaffirm buying pressure.

Bullish Engulfing Bullish Signal

The Bullish Engulfing candle can help traders to analyze the market sentiment and is useful for signaling the start of a new uptrend, as the bullish green body completely surrounds or engulfs the previous day’s red candlestick.

It is often refer to a bullish trend reversal when preceded by a cluster of red candlesticks showing a bearish trend.

When bullish engulfing occurs, it means more buyers entered the market, pushing the price upward, hence resulting in a trend reversal. This candle usually occurs at the bottom of a downtrend.

When visible, this bullish pattern also signals that the previous downtrend has ended and a potential reversal trend (a new uptrend) is beginning.

The first candle (A) must be a down candle, usually is colored red. The size of the red candle can be large or small. The key to the pattern is the size of the second candle.

The second candle (B) will need to engulf or overlap the first candle. Technically, this means the opening price for the second candle must be lower than the closing price of the first candle.

Risk-to-reward Ratio Advantage

After the engulfing pattern is confirmed as being completed, we can receive an attractive risk-to-reward ratio into the position. 

We can place our stop loss and risk level at the swing low of the engulfing pattern. This can help us to target at least twice the range of our stop loss and this would create a 1:2 risk-to-reward ratio.

How would traders use ‘Bullish Engulfing’ pattern to trade?

Here are 3 scenarios that a traders might use the ‘Bullish Engulfing’ to trade.

• Traders might buy a stock when prices surge after a gap down on the second trading day. Do note that the price rally could also mean there is a market sentiment reversal if we see that the volume increase significantly with the surge in stock price.

• Traders might choose to wait for one more day after the bullish reversal (which is when the 2-candlestick pattern appear).

• There will be traders who would prefer to

  wait for another signal after this pattern formation. This sign is primarily a price break on the downward resistance line.

I would use $Amazon.com(AMZN)$ as an example to look at the bullish engulfing candlestick pattern and see if it is true.

Amazon (AMZN) - 18 April to 19 April 2023

As we can see the first candle (A) is a bearish candle on 18 April 23 and the following day (19 April 23) we saw that AMZN opening price is lower than the closing price on 18 April 23.

At the end of trading day (19 April 23), we can see that the green candle have engulfing the red candle on 18 April 23.

This would indicate the start of a bullish trend for AMZN. If we look at how AMZN have traded since 19 April 23.

Our stop loss could be placed at the lower swing of the pattern, which is around $100. I believe we have not trigger the stop loss till date.

Summary

The bullish engulfing candlestick chart is only one of the method you can see if there will be a bullish signal for a particular stocks.

It need to be used with other indicators or technical analysis. But for a start, we can use it to sense the market.

You can try to see if you are able to use this pattern to determine any stocks that is starting its bullish trend.

Appreciate if you could share your thoughts in the comment section whether you use ‘bullish engulfing’ and find it useful in your trading journey?

@TigerStars @Daily_Discussion appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.