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The Engulfing Pattern consists of two candles: a smaller candle followed by a larger candle of the opposite colour.
In this pattern, the body of the second candle completely engulfs the body of the first candle, signalling a potential trend reversal. Engulfing patterns are of two types: the Bullish Engulfing Pattern and the Bearish Engulfing Pattern.
This article will guide you through the definition, types, and how to trade the pattern.
Key Takeaways
- An engulfing pattern consists of two candlesticks in which the real body of the second candle completely covers that of the first.
- A bullish engulfing pattern forms after a market decline, whereas a bearish engulfing pattern appears after an advance.
- The pattern is significantly more reliable when it occurs near a key support or resistance zone.
- Analysing trading volume and subsequent price action helps confirm whether the shift in momentum has genuine substance.
- An engulfing formation serves as a potential reversal signal rather than a guarantee of a trend change.
What is an Engulfing Pattern?
An engulfing pattern consists of two candles, as mentioned above. This pattern is called the Engulfing Pattern because the second candle appears to entirely engulf the first small candle.
The Engulfing Pattern is of two types: a Bullish Engulfing and a Bearish Engulfing Pattern.
Bullish Engulfing Pattern
The Bullish Engulfing Pattern is a two-candlestick pattern that appears at the bottom of a downtrend. As the name suggests, it is a bullish pattern that prompts traders to take long positions.
Bearish Engulfing Pattern
The Bearish Engulfing pattern is a two-candlestick pattern, the opposite of the Bullish Engulfing Pattern. This pattern appears at the top of the trend, making it bearish. The setup remains very similar to the bullish engulfing pattern, except one must think about it from a shorting perspective.
At times, the stock opens flat or slightly higher than the previous session. The selling pressure persists throughout the day, eventually dragging the price down. This is often read as a sign the uptrend is losing momentum and could be due for a reversal.
Bearish Engulfing Pattern: Price Example & Execution
A Bearish Engulfing pattern is a two-candle reversal setup that occurs at the end of an uptrend. It signifies a sharp shift in market sentiment from buyers to sellers.
To see how this works in practice, here is a concrete step-by-step price example:
Concrete Price Example
Consider a stock in an ongoing uptrend over several trading sessions:
Day 1 (Bullish Candle)
- Market Context: Buyers are still in control.
- Open: ₹500
- High: ₹515
- Low: ₹498
- Close: ₹510
Result: A small green/white real body representing modest upside momentum.
Day 2 (Bearish Engulfing Candle)
- Market Context: Market opens higher due to bullish momentum, but strong selling pressure overwhelms buyers, driving prices far below Day 1's open.
- Open: ₹512 (Gaps up or opens above Day 1 close of ₹510)
- High: ₹520
- Low: ₹485
- Close: ₹490 (Closes below Day 1 open of ₹500)
Result: A large red/black real body (₹512 to ₹490) that completely covers/engulfs the real body of Day 1 (₹500 to ₹510).
|
Metric |
Day 1 (Bullish) |
Day 2 (Bearish Engulfing) |
Visual / Structural Relationship |
|
Open |
₹500 |
₹512 |
Day 2 Open (₹512) greater than or equal to Day 1 Close (₹510) |
|
Close |
₹510 |
₹490 |
Day 2 Close (₹490) less than Day 1 Open (₹500) |
|
Body Range |
₹10 (₹500 – ₹510) |
₹22 (₹490 – ₹512) |
Day 2 Body (₹22) completely engulfs Day 1 Body (₹10) |
Bullish vs Bearish Engulfing
|
Factor |
Bullish engulfing |
Bearish engulfing |
|
Location |
After a downtrend |
After an uptrend |
|
First candle |
Bearish |
Bullish |
|
Second candle |
Bullish |
Bearish |
|
What it suggests |
Buyers gaining control |
Sellers gaining control |
|
Potential outcome |
Upward reversal |
Downward reversal |
|
Key area to watch |
Support |
Resistance |
How to Identify an Engulfing Pattern?
-
Confirm the preceding trend: A valid setup requires an established prior trend, a clear market decline for a bullish engulfing or a prior advance for a bearish engulfing.
-
Inspect the first candle: It should align with the ongoing trend, appearing as a smaller body in the direction of the prior move.
-
Evaluate the second candle: The subsequent candle must move against the trend with a larger real body that completely engulfs the body of the first candle, while wicks and shadows are disregarded.
-
Monitor subsequent price action: Observe the following sessions to verify whether prices hold the pattern's key levels or quickly invalidate the signal.
How to Trade an Engulfing Pattern?
-
Waiting for confirmation: Instead of entering the moment the pattern appears, many traders wait for price to break the high of a bullish engulfing candle or drop below the low of a bearish engulfing candle in the next session.
-
Prioritising risk management: Determining your exit strategy matters most because a failed pattern invalidates the trade idea if price breaks key support or resistance levels.
The Rule on Wicks (Shadows)
A common point of debate among technical analysts is whether the second candle's body must engulf the entire prior candle or just its real body:
-
The Traditional Rule: According to classic candlestick theory, only the real body of the first candle needs to be engulfed by the real body of the second candle. The wicks (upper and lower shadows) of the first candle do not need to be covered to form a valid engulfing pattern.
-
The High-Conviction Variant: While engulfing the wicks is not required, engulfing the entire shadow range demonstrates significantly stronger institutional conviction. When the high and low of the second candle completely encompass the entire high-to-low range of the first candle, it proves that buyers (or sellers) rejected the previous session's extremes and established total control over the entire price range.
Volume Analysis in Engulfing Patterns
Volume acts as a crucial confirmation tool, helping traders distinguish high-probability engulfing setups from false breakouts and low-liquidity traps.
-
Surge on the Engulfing Candle (Candle 2): A valid engulfing setup should ideally show a marked increase in trading volume on the second candle. High volume confirms strong institutional buying or selling pressure driving the reversal.
-
Drying Up on the Prior Candle (Candle 1): The first candle typically forms on average or declining volume, signaling that the prevailing trend is losing momentum and exhausting itself.
-
The Low-Volume Trap: If an engulfing pattern forms on below-average or declining volume, exercise caution. Low volume indicates a lack of market participation and conviction, significantly increasing the likelihood of a failed reversal.
Engulfing Pattern vs Other Reversal Signals
The engulfing pattern is often grouped with other candlestick reversal formations such as the hammer, morning star and harami.
The key difference is that an engulfing pattern uses two candles to show a sharp change in control between buyers and sellers.
There is no need to load the chart with multiple patterns. For most setups, the more useful question is whether the engulfing pattern agrees with the trend, price level, and volume.
That keeps the analysis focused on context rather than pattern collecting.
Mistakes to Avoid with the Engulfing Pattern
- Treating every pattern as an automatic reversal: Ignoring that engulfing candles can fail, resulting in price continuing in its original direction.
- Ignoring the prevailing trend: Overlooking the fact that a reversal pattern only holds significance after a clear preceding move.
- Focusing purely on candle colour: Assuming simple colour alternation is enough, when the true measure is the structural body relationship between the two candles.
- Disregarding support and resistance: Trading patterns that form in the middle of a range rather than at genuinely significant price levels.
Conclusion
The engulfing pattern earns its usefulness by capturing a visible shift in the balance between buyers and sellers across two trading sessions. A bullish engulfing can point to a possible turn after a decline, and a bearish engulfing can flag fading momentum after a rally, but the candles themselves are only one piece of the puzzle.
The stronger approach checks trend, key price level, the engulfing candle itself, and confirmation altogether. That turns the pattern from a matter of spotting two candles into a genuine read on whether the market is actually showing signs of changing direction.
