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A bullish engulfing is a pattern that occurs when a black/red shot candlestick follows by a green/white, or hollow candlestick on the price chart. The opening price was higher that the closing price, indicating a black or red candlestick. If the closing price was higher than the opening price, the hollow or green candlestick is indicated. A bullish engulfing signalling a rapid turnaround in market sentiment is when the actual body of the red or dark candle is completely subsumed by the hollow or larger green or white candle.
This is because the closing prices were not as high as they had been due to selling pressure. The day saw more buyers come in, pushing up prices enough to make the closing prices higher than they were the previous day. The candle's real body is the broad part of it, which shows the range of closing and opening prices. The highs and lows of the day are represented by the candlestick's tail shadows.
What is a Bullish Engulfing Pattern on a Chart of Prices?
1. Bharat Electricals Limited closed at 464.95 points on day 1 than it opened at (478.50), as indicated by a red candle.
2. The prices opened at 453.80 on day 2. This was even lower than the opening of the previous day due to selling pressure. However, buyers came in and drove up prices. The final close was 491.85 points. This is indicated by a larger, greener candle. This is reflected in a large, green candlestick that completely covers the red candlestick.
3. Larger the size of the second candlestick (green/hollow/white), than the smaller first candlestick, more prominent is the bullish sentiment.
4. You may notice that the wick on the green/white candlestick is often small. The day's highest price is represented by the wick. The white candlestick's wick is short and indicates that prices have closed near the day's highest, with more buying power left.
Bullish engulfing is not defined by a price movement that goes down followed by an uptrend. Bullish engulfing is a pattern where the prices open lower than the previous trading session. The prices must also close at a higher level than their previous close regardless of the day's highs or lows.
1. A bullish engulfing structure is usually found at the bottom end of a downtrend in a market.
2. Bullish engulfing signals market sentiment reversal. This could be caused by announcements, price corrections or other positive triggers. To determine if the reversal in bullish sentiment is sustainable, look at whether the red/black candlestick in the current bullish-engulfing pattern was preceded by four candles that were red/black. A white or green candlestick follows, which closes at the same high as the bullish-engulfing candles. This means that prices rise from their previous high close on day 3.
3. This shows the point at which the bulls took over the pricing game from the bears.
Trading strategies using bullish engulfing
Bullish Engulfing can be used by traders to signal a buy in the following situations:
Day 2 Close
If there is a lot of trading volume, traders could buy or enter when the prices close higher on Day 2.
Day following the engulfing
Some traders who are more conservative may wait until the third day to confirm the trend reversal, sustained change in sentiment, and to make sure it wasn’t temporary market euphoria. Some traders may decide to wait and watch for signals like stock falling to a new low, or the market closing down further. They may lose potential profits, but they will gain insight into the price trend.
- Waiting for another signal
Bullish engulfing is not the only signal traders need. Traders also look for other signals such as prices breaking through resistance.
Bearish engulfing patterns are the opposite to their bullish counterparts. In these cases, prices are expected decrease and bears rule the market sentiment. This is where a green or white candlestick is engulfed in a red or dark down candlestick the next trading day. It indicates that prices closed lower than the opening price of the day and also that they gapped down from the previous day.
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