Bullish and bearish Engulfing candlestick patterns, also called Outside bars, are powerful dual-candle formations. Found at the end of a downtrend or uptrend, these patterns often indicate a potential reversal. Engulfing patterns are also easy to spot, which adds to their popularity and makes trading with them very straightforward.

The difference between this pattern's bullish and bearing versions depends on the candle order within it.

Bullish Engulfing candlestick pattern

A bullish Engulfing pattern occurs at the end of a downtrend and consists of two candles. The first candle is bearish (red) and has a relatively small body and short shadows, also known as wicks. The second candle, on the other hand, is bullish (green) and has longer wicks and a longer body that engulfs the body of the previous bearish candle.

Bullish Engulfing candlestick pattern (Outside Bar)

The body of the first candle doesn't necessarily need to be exactly in the middle as long as it's completely overwhelmed by the body of the second candle. For a candlestick pattern to qualify as bullish Engulfing, the high price of the second candle should be higher than the high price of the first candle. The same scenario applies to the low prices – the second candle must have a lower low price than the first one.

If the closing price (top of the body) of the second candle is higher than the high price (top of the wick) of the first candle, the Engulfing pattern is considered a much stronger bullish reversal signal. The reason is that the second candle indicates that bulls gained control over the price.

Bearish Engulfing candlestick pattern

A bearish Engulfing pattern works exactly the same way. The only difference is that it is a bearish reversal pattern that occurs at the top of an uptrend, with a bullish (green) candle on the left and a bearish (red) one on the right.

How do Engulfing patterns work?

As we mentioned above, both patterns take place at the end of a strong trend. The first candle in both formations (either bullish or bearish) signals the continuation of a trend. On the other hand, the second candle (bearish or bullish, respectively) is powerful enough to completely shut down the first one and initiate a new trend.

Engulfing candles in trading are very significant when conducting analysis, as traders usually aim to capitalise on new trends when markets change direction. Reversal patterns, such as bullish and bearish Engulfing patterns, signal an impending change in the price direction, as the so far dominant force has started losing momentum, which allows the other force to step in.

However, as with other candlestick patterns, Engulfing formations have their own limitations. While they are quite powerful at the end of a strong trend, they are almost non-tradeable when they appear in a sideways market.

Engulfing vs Harami candlestick patterns

An Engulfing pattern has an opposite version – a Harami candlestick formation, also called an Inside Bar. Its structure is identical, but the candles within it swap places. The first candle is long, entirely overwhelming the second smaller candle. A Harami candle can also exist in two variations – bullish and bearish.

Bullish and bearish Harami candlestick pattern (Inside bars)

However, in general, this pattern doesn't provide a strong signal. Once it occurs, it may indicate an upcoming reversal, but the price often starts trading sideways instead or continues following the trend. That's why this pattern is not particularly popular among traders.

How to trade with Engulfing patterns

A trading strategy with Engulfing patterns is pretty straightforward as they provide a powerful signal on their own.

Trading with a bearish Engulfing pattern

On the image below, you can see a series of highs and lows that created an uptrend. Following a new short-term high price (the first candle in the bearish Engulfing pattern), the price suddenly drops lower to create a strong, powerful bearish candle.

Trading with a bearish Engulfing pattern

All elements are in place, and the bearish Engulfing pattern occurs. After that, the price still has both lows and highs but ultimately trades at lower levels.

In this particular example, you can see the power of a bearish Engulfing pattern. The trend reversed after the second candle generated a signal that the bears had taken control of the price, and the downtrend may be finished.

In such cases, traders tend to go short, using the second candle as an entry point and its high price as a stop loss. The take-profit level is derived using other technical indicators.

For a more complete trading strategy, you may also use additional technical analysis tools, such as support and resistance or technical indicators.

For example, if we zoom out of the previous price chart, we can see a potential placement of two support levels that may (and did, in this case) affect a newly formed trend.

A bearish Engulfing candlestick pattern with support lines in a price chart

On the other hand, if you have a long position open in an uptrend, a bullish Engulfing candle pattern may serve as a signal to exit the market before it reverses.

Trading with a bullish Engulfing pattern

A strategy with a bullish Engulfing formation would work exactly the same, but you would go long following the same logic. With a short position in a downtrend, this pattern would also serve as an exit signal.

For example, the image below shows a bullish Engulfing pattern in action – the downward reversed right after the formation occurred.

Trading with a bullish Engulfing pattern

Keep in mind that even the most accurate trading signals never guarantee that the market will move in the predicted direction. That's why experienced traders always have risk management tools, such as stop loss and take profit in place.

Create a demo account to solidify your knowledge in a risk-free market environment. Alternatively, move to our next article, where we explain how Marubozu candles work.

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