The bullish engulfing pattern is most significant when it occurs following a prolonged downtrend. The stock or index is selling off sharply. Upon the day from the bullish engulfing pattern, prices will often start the day by falling. However, strong buying interest is available in and turns the marketplace around.
The bullish engulfing pattern is so named since the open-close choice of this candle surrounds or engulfs the open-close range from the previous one. The bullish engulfing represents a reversal of supply and demand. Whereas supply has previously far outstripped demand, now the buyers tend to be more eager compared to the sellers. Perhaps with a market bottom, this really is just short covering initially, though it‘s the catalyst that ultimately creates a buying stampede.
When analyzing the bullish engulfing pattern, always concentrate on its size. The wider the candle, the greater significant the possible reversal. A bullish engulfing candle that consumes several from the previous candles speaks of the powerful shift out there.
Apple Inc. provided a very good example of the pattern last summer. Apple were on the downtrend from June 1 until June 20. Then, on June 23, Apple formed a bullish engulfing pattern where that day’s candle engulfed the previous day’s candle completely and suggested the market would embark on a brand new bullish rally.
As seen in “Expanding opportunity” (below ), the trader wouldn‘t buy exactly on June 23 once the bullish engulfing pattern was formed, however. The trader would wait to the June 23 high of $331. 69 to become broken and sustained for any subsequent trading session. Confirmation came on June 28, when prudent traders may need initiated long positions. A reasonable level for any stop loss would function as the June 23 low of $318.
The bearish engulfing pattern is that the opposite from the bullish engulfing pattern. Like its companion, It‘s most significant when it occurs following a prolonged, steady trend. Upon the day from the bearish engulfing pattern, prices often begin by rising. However, strong selling is available in and turns the marketplace around.
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