Bullish Engulfing Candle: The Ultimate Signal to Ride Bigbulls

In the world of trading and technical analysis, understanding reversal patterns is crucial to spotting potential changes in trend direction. One such important reversal pattern is the Bullish Engulfing Candle, which provides valuable insights into price action and market behaviour. This pattern is particularly useful for detecting Signs of Strength after a strong downtrend and is instrumental in identifying possible turning points. Let’s explore this pattern in detail, breaking it down step-by-step.

What is a Bullish Engulfing Candle?

The Bullish Engulfing Pattern is a price action pattern observed on two consecutive price candles:

• First Candle: This is a bearish candle, meaning the price closes lower than the previous candle, showing selling interest.
• Second Candle: This is a bullish candle that completely engulfs the body of the previous bearish candle. This pattern suggests that buyers have taken control, overwhelmed the previous bearish sentiment, and it indicates strong buying pressure.

This pattern often signals a change in trend after a prolonged downtrend, especially when it occurs at areas of previous support.

How to Identify a Bullish Engulfing Candlestick Pattern?

Here’s a five-point checklist to correctly identify a Bullish Engulfing Pattern:

1. Look for a Downtrend – The pattern must appear after a series of lower highs and lower lows, indicating a prevailing bearish sentiment.
2. First Candle (Bearish) – A small red candle that closes lower than it opened, showing that sellers are still in control.
3. Second Candle (Bullish) – A large green candle that completely engulfs the previous candle’s body (open-to-close range), signaling a shift in momentum.
4. Higher Closing Price – The bullish candle should close above the previous candle’s open, confirming strong buying pressure and a potential reversal.
5. Higher Volume – Increased trading volume on the second candle strengthens the pattern’s reliability, indicating institutional buying.

Note: The larger the engulfing candle and the higher the volume, the stronger the reversal signal!

What is the Meaning of a Bullish Engulfing Candlestick Pattern?

The Bullish Engulfing Pattern represents a shift in market sentiment from bearish to bullish. The meaning behind this pattern includes:

• Strength of Buyers: The large bullish candle shows strong buying pressure, overpowering the previous selling momentum.
• A Sign of Strength/Reversal Signal: If it forms after a downtrend near previous support, it is a Sign of Strength (SOS). This suggests that selling interest is fading, and the market may struggle to move lower.
• Increase in Demand: The first candle shows selling activity (a down candle), but when followed by an up candle with high volume, it indicates that the supply is weakening, and demand is increasing.
• Potential Entry Point: The close of the second candle above the high of the first candle confirms that buyers are more dominant than sellers in the market, suggesting the end of the downtrend and the beginning of a potential uptrend.

What is the Psychology of the Bullish Engulfing Candle?

The bullish engulfing pattern isn’t just a visual formation—it reflects a psychological shift in the market. Let’s break it down:

• First Candle (Bearish Sentiment): Sellers are in control, continuing the downtrend as fear dominates. Traders short the market, expecting further downside.
• Second Candle (Aggressive Buying): Suddenly, buyers step in forcefully, rejecting lower prices. They overwhelm the selling pressure and drive the price upward.
• Strong Bullish Close (Market Sentiment Shift): The second candle doesn’t just recover losses—it closes above the first candle’s high, proving that bulls have taken over.
• Confirmation (The Short Squeeze Effect): Now, think about those who sold during the first candle. They expected the trend to continue downward, but now they’re trapped as the price moves against them. Their losses pile up, forcing them to buy back their positions, fueling an even stronger rally.

This shift from fear to forced buying is what makes the Bullish Engulfing Pattern one of the most powerful reversal signals in technical analysis. It’s not just about price action—it’s about how traders react under pressure.

Ultra-High Volume and Its Significance

In our previous article, Why Volume Matters in Trading, we discussed how smart money leaves footprints in the form of volume. The same principle applies here—volume is a crucial factor in confirming the strength of a bullish engulfing pattern.

• Ultra-High Volume on the First Down Candle – At first glance, a large red candle with high volume might seem like aggressive selling. But is it really? In many cases, smart money is actually accumulating long positions while retail traders are panic selling. They absorb the selling pressure, preparing for a reversal. You can validate this using our Candle Range Theory by switching to a lower time frame and analyzing price-volume divergence.

• Ultra-High Volume on the Second Up Candle – This is where the real confirmation happens. If the second candle in the bullish engulfing pattern prints with ultra-high volume, it’s a strong sign that institutions and big players are aggressively buying. This validates the reversal and signals a potential price surge ahead.

Volume isn’t just a supporting indicator—it’s the key to understanding market participation. When a bullish engulfing pattern is backed by ultra-high volume, it’s no longer just a simple price pattern; it’s a strong demand-driven move that can lead to significant upside momentum.

Why Does a Bullish Engulfing Candle Mark a Strong Candle?

Ever wondered why a bullish engulfing pattern stands out as a powerful signal in the market? Let’s break it down step by step.

• A Failed Downtrend Attempt – The first candle in the pattern represents an effort to push the market lower, but that attempt doesn’t hold. The second candle not only erases those losses but also closes near its highs, signaling a decisive shift in momentum.
• Smart Money’s Involvement – Institutions and professional traders don’t just randomly jump into trades. The second candle often prints with ultra-high volume, showing that smart money is actively buying. This isn’t just a casual bounce—it’s a strong confirmation of demand taking over supply.
• A Market Reaction to Weakness – The second candle’s surge isn’t just a coincidence; it’s the market’s response to the prior bearish move. When price action aggressively reverses like this, it tells us that buyers are now in control.
• Trapped Sellers Fuel the Rally – Now, think about the traders who sold on the first candle, expecting the downtrend to continue. Once the price closes above the first candle’s high, those sellers are trapped. Their losses start piling up, and what do they do? They rush to buy back their positions, adding even more momentum to the upside.

This is why a bullish engulfing candle is more than just a reversal pattern—it’s a sign that demand is overpowering supply, and the price may be setting up for a strong move higher.

Bullish Engulfing Candle Low as Support

Have you ever noticed how a bullish engulfing candle can set the stage for a strong move?

When a bullish engulfing pattern forms, the low of the second candle isn’t just a random level—it’s where buyers stepped in with conviction, completely overpowering the previous bearish sentiment. The price closes above the previous candle’s high, confirming the shift in momentum. That low? It’s now a key support zone, and retailers often place their stop-loss orders there.

But here’s where it gets interesting. Ever wondered why price sometimes dips back to that level? That’s smart money at play. They might push the price down with low volume, triggering stop-losses, grabbing liquidity, and filling their positions before launching the next move. If the price then closes above the first candle’s high, it’s a strong signal—one that presents a high-probability entry for a long position.

Alright, let’s break this down step by step.

Candle-1: Bullish Engulfing in a Downtrend

The market is in a clear downtrend, with no strong support nearby. Suddenly, we see a bullish engulfing candle, which completely engulfs the previous bearish candle. This is a sign that buyers are stepping in aggressively, taking control for the moment.

Candle-2: Identifying bullish engulfing candle low as support

Now, the low of this bullish engulfing candle becomes an important level to watch. This is where buyers showed strength, and it’s a level we need to pay close attention to if the price comes back.

Candle-3: The Fake Breakdown Trap

Price starts to retrace towards this level, but here’s something interesting—the retracement happens on low volume. This tells us that selling pressure is weak.

But then, we see a breakdown below the engulfing low, and this time, it happens with volume. Retail traders panic, thinking the market is going lower, and their stop-losses get triggered. But is this a real breakdown? Let’s wait and see.

Candle-4: Smart Money Steps In

Here’s where the real action happens—the price reverses strongly with high volume. This is smart money absorbing the liquidity created by the fake breakdown. And notice something important: the price closes above the high of the breakdown candle, completely invalidating the bearish move.

Candle-5: The Uptrend Begins

Now, with sellers trapped and forced to cover, the price takes off in a strong uptrend. This is a classic bullish reversal after a fake breakdown, where smart money tricks retail traders before making their actual move.

This is why waiting for confirmation and watching volume is crucial—not every breakdown is real, and smart money often plays these traps to shake out weak hands!

Next time you see a bullish engulfing candle, keep an eye on that low. It might just be the perfect place to position yourself ahead of the big players.

Is the Bullish Engulfing Pattern Reliable?

If you’ve analyzed charts, you’ve probably seen plenty of bullish engulfing patterns—and even more when zooming into lower time frames. But not all of them lead to strong reversals. So, how do you filter out the high-probability bullish engulfing candles from the weaker ones?

Higher Reliability Factors:

1. Occurs after a strong downtrend – The longer and steeper the trend, the more likely the reversal is meaningful.
2. Forms at key support levels or moving averages – A bullish engulfing candle bouncing off a strong support zone increases its significance.
3. High trading volume – If the second candle prints with ultra-high volume, it confirms strong buying interest from institutional traders.
4. Appears on higher time frames – For day traders, a 5-minute or 15-minute bullish engulfing pattern is more reliable than one on a 1-minute chart.

Lower Reliability Factors:

1. Forms in a choppy or sideways market – When price action lacks a clear trend, engulfing patterns are more likely to be false signals.
2. Low volume on the second candle – If the pattern lacks strong buying volume, the reversal might not hold.
3. No confirmation from follow-up candles – If price fails to continue upward after the engulfing pattern, the setup loses credibility.
4. Appears on very low time frames (1-min, 3-min) – These time frames have more noise, making patterns less reliable for day traders.

A bullish engulfing pattern is powerful, but context matters. When combined with key support levels, high volume, and confirmation from subsequent candles, it can signal a high-probability trade.

What is a Bullish Engulfing Candle Trading Strategy?

The Bullish Engulfing pattern is one of my go-to techniques for precise trade entries and stop-loss placement. When used correctly, it helps traders enter high-probability trades while managing risk efficiently.

Step-by-Step Trading Strategy:

Entry Point: Enter a long position after the bullish engulfing pattern is confirmed. The ideal entry is when the engulfing candle closes above the previous candle’s high.

Stop Loss Placement: To minimize risk, place a stop loss below the low of the engulfing candle. This ensures that if the market moves against you, losses are controlled.

Profit Target: Set a take-profit target at the next resistance level or follow a risk-reward ratio of at least 1:2 for better trade management.

Position Exit: If you are in a short position and a bullish engulfing candle form, this is a warning sign. If price action confirms a reversal, it’s wise to exit your short position and avoid unnecessary profit giveaway.

This strategy helps traders capitalize on bullish reversals while maintaining strong risk management. By combining the pattern with key support levels and volume confirmation, traders can significantly increase their win rate.

Key Takeaways and Actionable Insights:

• Bullish Engulfing Pattern highlights significant trend changes and Signs of Strength.
• A Bullish Engulfing Pattern at support indicates that the downtrend might be coming to an end, especially if the second candle has high volume and closes near its highs.
• Always look for confirmation after spotting these patterns, such as a No Supply signal or further price action near the high of the second candle.
• Ultra-High Volume plays a crucial role in confirming the validity of the reversal.
• The effort vs. result principle matters—if the first candle’s high volume shows weakness, but the second candle rallies strongly, it signals genuine demand and potential price appreciation.

By understanding and applying these insights, traders can better anticipate market reversals and increase their trading accuracy. Let price action and volume be your guide!

Note: This article is part of Tradonomics’ Smart Money Secrets with Volume Price Analysis series. Explore it to unlock powerful trading insights and master Volume Price Action!