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Bullish and Bearish Engulfing Patterns

Engulfing Candlestick Patterns

The hammer and hanging man are individual candlestick patterns. As previously discussed, they can send important signals about the market's health. Most candlestick signals, however, are based on combinations of individual candlestick patterns. 
The engulfing pattern is the first of these multiple candlestick line patterns. The engulfing pattern is a major reversal signal with two opposite colour real bodies composing this pattern.

Bullish Engulfing
· A bullish engulfing pattern is a candlestick chart pattern that forms when a small red candlestick is followed the next day by a large green candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
· Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more red candlesticks.
· Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks.

Bearish Engulfing
· bearish engulfing pattern can occur anywhere, but it is more significant if it occurs after a price advance. This could be an uptrend or a pullback to the upside with a larger downtrend.
· Ideally, both candles are of substantial size relative to the price bars around them. Two very small bars may create an engulfing pattern, but it is far less significant than if both candles are large.
· The real body—the difference between the open and close priceof the candlesticks is what matters. The real body of the down candle must engulf the up candle.
Criteria to form Bullish Engulfing
 For a bullish engulfing pattern to form, the stock must open at a lower price on the second candle than it closed at on the first candle. If the price did not gap down, the body of the green candlestick would not have a chance to engulf the body of the previous day’s red candlestick.
 Because the stock both opens lower than it closed on First Candle and closes higher than it opened on the first candle, the green candlestick in a bullish engulfing pattern represents a day in which bears controlled the price of the stock in the morning only to have bulls decisively take over by the end of the day.
Criteria to form Bearish Engulfing
 A bearish engulfing pattern is seen at the end of some upward price moves.
 The pattern has greater reliability when the open price of the engulfing candle is well above the close of the first candle, and when the close of the engulfing candle is well below the open of the first candle.
 A much larger down candle shows more strength than if the down candle is only slightly larger than the up candle.
 The pattern is also more reliable when it follows a clean move higher. If the price action is ranging, many engulfing patterns will occur but they are unlikely to result in major price moves since the overall price trend is ranging.
Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don't provide a price target. However you can keep SL to just below it’s lower end.
Bullish and Bearish Engulfing Patterns Reviewed by Kumar Chandan on February 08, 2020 Rating: 5

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