How to Trade the Bullish Engulfing Pattern | Daily Price Action

How to Trade the Bullish Engulfing Pattern

The bullish engulfing pattern is one of my favorite reversal patterns in the Forex market. I have previously written about how to trade the bearish engulfing pattern, and as you might expect there are many similarities between the two.

As similar as they may be, I believe each deserves its own spotlight given the significance of the pattern.

Navigating the Forex market to find consistent profits is all about following the clues it leaves behind. Of course, when I say clues, I’m referring to the formations that price action leaves in its wake.

One such formation is that of the bullish engulfing bar. They don’t come around often, but when they do it’s important that you know how to take full advantage of the profit potential.

In this lesson, you will learn what a bullish engulfing pattern is and how you can trade it for huge profits. You will also learn the three characteristics that must be present to make it tradable. Knowing these three things will help you maximize your profit potential and minimize your risk.

What is a Bullish Engulfing Bar?

First and foremost, know that the terms engulfing bar and engulfing candle are interchangeable. They are simply two different ways of saying the same thing.

A bullish engulfing bar typically forms after an extended move down. It signals exhaustion in the market where sellers begin to book profits and buyers begin to take an interest, thus pushing prices higher.

As the name implies, an engulfing candle is one that completely engulfs the previous candle. Another way of saying it is that the previous candle is completely contained within the engulfing candle’s range (low to high).

The illustration below shows a bullish engulfing candle in action.

Bullish engulfing bar in the Forex marketNote that the engulfing candle’s range completely engulfs the previous candle.

One thing I want to point out is that it’s okay if the body of the engulfing candle doesn’t engulf the previous candle. What’s more important is whether the range of the engulfing candle contains the previous one.

Here is an example:

Forex bullish engulfing candle

The illustration above shows an engulfing candle where the range engulfs the previous candle but the body (open and close) are inline with the previous candle. This is okay because the range of the engulfing candle still completely covers the preceding candle.

In my experience, the most probable patterns are the ones where the body of the engulfing bar engulfs the previous candle. The reason this pattern works so well is because of conviction in the market. So the more conviction you have, the more probable the setup becomes.

That said, patterns where only the range engulfs the previous candle can also be extremely effective and should not be ignored.

Before we move on, I want to point out that the bullish engulfing pattern is most effective on the higher time frames. Therefore anything below the daily time frame should be ignored.

Trading the Bullish Engulfing Pattern

There are many different ways to trade this pattern, ranging from buying as soon as the candle closes to waiting for a pullback to support. The way I like the trade it is a bit different from what you are probably used to seeing.

The strategy I’m going to teach you today has three parts to it:

  1. Bullish engulfing bar
  2. Swing low
  3. Broken resistance level

The first two points above are pretty obvious when trading this reversal pattern. However what may not be so obvious is the third requirement – a broken resistance level.

Remember my comment about conviction? The effectiveness of this pattern is all about the level of bullish conviction in the market. So when you combine the pattern with a broken resistance level, the conviction becomes that much stronger.

To further this point, you wouldn’t want to trade this pattern with a key resistance level just above it. You would run the risk of having your position come back on you within the first 24 hours of taking a position.

Now that we’ve covered the requirements, let’s get into an example.

The chart below shows a bullish engulfing pattern that formed on the NZDJPY daily time frame.

NZDJPY bullish engulfing pattern on the daily time frame

The chart above illustrates the first two requirements of the pattern. We have a bullish engulfing candle at a swing low.

Notice how the body of the engulfing candle doesn’t cover the previous one. However, the range certainly does. This represents a valid bullish engulfing bar. But to make it a tradable pattern we need a key level.

Before we get to that, let’s get some perspective on this setup. The chart below shows the daily time frame again, only this time we’ve zoomed out to get a feel for where the setup formed relative to previous price action.

Bullish engulfing bar at key support

The NZDJPY daily chart above shows more than a year’s worth of price action. A few things to note here before we move on:

  1. The bullish engulfing bar formed at trend line support
  2. The engulfing bar closed above our key level
  3. The market had 400 pips to work with before it would run into the next resistance level

Now that we have a good feel for the context of the setup, let’s dig into the details.

NZDJPY bullish engulfing pattern at key support level

Keeping the same levels on the chart, we’ve now moved in for a closer look at the setup. The first thing to notice is how the bullish engulfing candle closed above our key level.

As we all know, old resistance becomes new support. So as soon as NZDJPY closed the day back above this key level, it began acting as new support.

Also take note of the distance between this key level that was broken and the next resistance level. This was a 400 pip range, giving us plenty of room to profit from this setup.

The next chart shows the setup from start to finish.

NZDJPY bullish engulfing bar setup

Now things are really starting to take shape. Notice that we entered on a retest of the key level that was broken, which now becomes support. Also take note where we placed our take profit – just below the next key resistance level.

One thing that may be unclear is the stop loss placement. Why wouldn’t we place it under the bullish engulfing bar?

You certainly could have done that and still maintained a favorable risk to reward ratio. However, I like to place my stops in positions where, if the market travels there, it’s going to make me a bit uncomfortable.

If the market is indeed going to respect the key level as new support, it should do so within a 20 to 50 pip window. Any more than that and there’s a good chance this market would see a larger correction. Therefore a 140 pip stop was more than acceptable if the market is indeed going to respect old resistance as new support.

By using a tighter stop loss, I was also able to achieve a better risk to reward ratio. Here is a breakdown of the numbers for this setup:

Our stop loss was 140 pips with a 400 pip profit target. This equals a potential 2.8R, or 5.6% profit if risking 2%.

The 50% Entry Strategy

For those who have been following me for a while, you know that I like to use the 50% entry method. Many traders believe that this method of entry only works with pin bars. However, it can also be used when trading engulfing patterns.

Here is a look at the same NZDJPY setup, only this time I have used the Fibonacci retracement tool to identify the 50% retracement level.

NZDJPY key Fibonacci levels

The chart above shows the 50% retracement level, which was found by dragging the Fibonacci tool from the engulfing bar’s low to the bar’s high.

Notice how the second candle following the engulfing pattern didn’t quite touch the 50% level, although it did come within 15 pips of it. This goes to show that using a 50% entry is not an exact science, nor is any other strategy or technique used in trading the Forex market.

Still, a 15 pip difference isn’t much. If you can identify a 15 pip area as a favorable entry, you are far ahead of the majority of retail traders.

Last but not least, I want to point out that although I like to use the Fibonacci tool in this manner, it is never used as a replacement for key support and resistance levels. These levels should always be first and foremost when identifying entries and exits alike.

Wrapping Things Up

Bullish engulfing patterns can be a great way to identify potential reversals in the market. They provide you with yet another clue you can use to determine a probable outcome, thus putting you one step closer to becoming a successful Forex trader.

We have covered a lot of material in this lesson, so let’s finish up with some of the more important points to keep in mind when trading this pattern.

  • To be a valid signal, the range of the bullish engulfing candle must completely engulf the previous candle’s range
  • The pattern is a great way to identify a potential bottom in the market
  • Only bullish engulfing bars that form on the daily time frame or higher should be considered
  • The formation is only valid if it occurs at a swing low
  • The engulfing candle must break a key resistance level to be considered tradable
  • Using the 50% retracement can be a great way to identify a favorable entry

Above all, remember that you need three characteristics for a bullish engulfing pattern to be considered tradable. 1) bullish engulfing bar, 2) swing low, 3) broken resistance level. Once you have those three things, you can move to the next stage of your analysis to determine if it’s a setup worth taking.

Your Turn

Are you currently trading bullish engulfing patterns? Having read this lesson, do you feel your view of the pattern has changed?

Leave your questions or comments below. I look forward to hearing from you.

  • Sofolahan says:

    I love your blog but I will like to call your attention to some error committed on nzdjpy chart analysis, the candlestick pointed to as bullish engulfing bar is incorrect I think it should be called pin bar, that is just my own observation. Thanks Sofolahan

    • Hi Sofolahan,

      I’m glad to hear you are enjoying the site. The candle you are referring to could be both. Although it isn’t a very well-defined pin bar as the nose is too long and the tail isn’t at least 2/3 of the range.

      Thanks for your comment.

      Justin

  • Fathin Muhammad Mustafa says:

    I love the engulfing strategy the most, and actually just look at bullish/bearish engulfing pattern (as a beginner)… but I have 1 question for you. What is your opinion about the bullish/bearish harami? yesterday 11 pm (dutch time) some pairs showed a bullish harami: EURJPY,AUSUSD,AUDJPY on the daily chart. thank you.

    • Hi Fathin,

      Thanks for your comment. The Harami isn’t something I pay attention to. Instead, I focus my attention on the simple price action, especially key levels, rather than trying to interpret every bullish or bearish candlestick pattern that emerges.

      Cheers.

  • Adenani says:

    Thank you very much, Justin Master. I love your lesson……

  • piet says:

    thanks sorry i didnt reply on previous lesson i found all ur lessons u gave me very informative and easy to follow in plain simple way of explaining ttank u Justin

  • Konrad says:

    Thank you Justin, it is clearly defined, but, just to precise, I have one question concerning swing low.
    Swing low is required, we have swing when engulfing bar breaks maximum of previous bar. When they are equal, there is lack of new high, means there is no swing, even if minimum of engulfing bar clearly covers previous bar. So, the sentence from definition: engulfing candle RANGE engulfs the previous candle has to be threaten very precisely. Am I right?
    Good lack

    • Konrad says:

      One more think to explain. Does, colour of engulfing bar has a meaning? What if we have black engulfing bar, but its shadows covers previous bar? Black in Black game? Is it worth to play?
      Best regards

  • Ray says:

    Good lesson. Knew somewhat about engulfing bars but putting them in the context of a broken level probably gives them a higher probability of being successful. Thanks for the good info.

    Ray

    • Ray, it absolutely does. I won’t take an engulfing setup unless the candle has broken a key level in the process.

  • Angel says:

    hi Justin, i really like this trading strategy. your explanation is easy to understand. However, am wondering if am to trade using this strategy on the daily time frame, would price reach my take profit or stop loss in a day?

    • Angel, in my experience engulfing candles work best on the daily time frame. You wouldn’t need it to hit one of your orders in a single day.

      • Angel says:

        Hi Justin, does the colour of a pin bar matter? What i mean is that must a bearish candle be black and must a bullish candle be white?

  • Angel says:

    Hello Justin, I am going to be using the engulfing pattern on the daily timeframe. But I have a question. What if an engulfing candle forms in an area where I don’t have a key level drawn, can i draw a horizontal line near the engulfing candle to check if it’s a key level I missed? Thank you.

    • I always suggest drawing your levels first. Otherwise, it’s too easy to see what you want to see rather than what actually exists.

  • Engr Moses says:

    Mr Justin, you are really great.
    You have really de-mystified forex trading
    Please can you prepare a lesson on how to best to apply fibonnaci tool and profit from it, both for price reversals and continuation.
    Thanks.

  • Bernard says:

    Hi Justin
    Thanks for such a great insight and very informative,great topic thank you I have learned a lot about the setup.

  • R Mngadi says:

    I think I have learned a great deal from you about the bullish engulfing bar. Thanks a lot.

  • MATHEW LESTER says:

    Hi Justin, have been enjoying the articles and the DPA Group, If a signal occurs on a day of a news event do you treat it with the same merit. e.g news at the end of the day could form a temporary Pin bar/engulfing bar that hasn’t had time to play out, so would you wait how the market reacts in the next session?

    • Hi Mathew, glad to hear you’re enjoying the content. As long as it isn’t a Friday or holiday for the country in question, it’s fair game. That said, where the signal occurs is the most important aspect. Without an established support or resistance area nearby, it’s just another candle.

  • Olly says:

    This is just #excellent!!!. My trading experience will change from poor to excellent. I am more than grateful.

  • Deen says:

    It’s really benefit me to trade by the information, tips and technique given.Thanks to you for inspired me in trading forex market.

  • Mattilight says:

    So great, I have review my currency charts history on the higher time frame and I found out how trustworthy and reliable this engulfing bar strategy is. Thks boss, may your day be long!!

  • Antohi+Dan says:

    I like your blog and lessons and now I read and read again and again…Thanks.

  • Antohi+Dan says:

    very interesting . thanks!

  • Thembi Khanyile says:

    If I can get detailed candlesticks and signals on when to buy or sell. I’d appreciate it

  • Asma says:

    Thank you :). Finally i’ve found out the perfect explanation of bullish engulfing

  • craig says:

    Hi there, In the case of GBPJPY at the moment it may close as a bearish engulf on the daily, weekly pinbar however it is on a weekly support, Would you then say that the candle is invalid until the support region breaks?

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