Bullish engulfing is the candlestick pattern that forms small black candlestick followed by large white candlestick that completely engulfs the previous day’s candlestick which appear during downtrend.The large white candle doen not necessery engulf the shadows of the black body. This bullish engulfing patern is an important bottom reversal signal.
Acknowledging Criteria:
1. Financial market is in prolonged downtrend.
2. Then we see a small black candlestick.
3. Next day we see a white body that completely engulfs the previous day small black candle.
Explanation:
While the financial market is in downtrend, we see some selling reflected by the small real black candle of the first day. Next day shows bull power with closing price are above previous day’s open price. It clearly means the bearish trend is now losing momentum and bulls are started to take the control.
The relative size of the bodies in the first and second days is important. If the first day of the bullish engulfing pattern is characterized by a very small real body like doji, but the second day is characterized by a very long real body, this strongly indicates that the bearish power is diminishing and the disparity of white versus black body is indicative of the emerging bull power.
There is higher probability of a bullish reversal if there is heavy volume on the second real body or if the second day of the Bullish Engulfing Pattern engulfs more than one real body.