Bullish engulfing candle

The pattern has two candles. The first is a falling candle that continues the decline. The second is a rising candle with a larger body: it opens at or below the close of the first and closes above its open. The body of the second candle engulfs the body of the first. The wicks do not have to be covered.

It is one of the classic Japanese candlestick reversal patterns described by Steve Nison. The reading: sellers were in control at the open, and by the close buyers had taken back the whole previous candle and more.

On stocks the second candle often opens with a gap below the previous close. Crypto and forex trade almost without gaps, so the open usually equals the previous close. The pattern still counts when the close is above the previous open.

• Prior trend – a clear decline, or a pullback inside a larger uptrend.
• First candle – falling, with a small or medium body.
• Second candle – rising, with a body that covers the first body from bottom to top.
• Size – the larger the second body relative to the first and to recent candles, the stronger the signal is considered.
• Wicks – if the second candle also covers the high and the low of the first, the pattern is read as stronger.

Volume on the engulfing candle above the recent average adds to the case. In Replay mode on Charts you can step through history one candle at a time and see how earlier engulfing candles on the same market played out.

• Entry – on the close of the engulfing candle, or when the next candle trades above its high. A more cautious entry waits for a pullback into the body of the engulfing candle.
• Stop – below the low of the pattern, the lower of the two candles' lows.
• Target – the nearest resistance, such as the last swing high of the decline, or a fixed multiple of the risk.
• Context – the signal carries more weight at a support level, at a Fibonacci retracement of a larger advance, or after a liquidity sweep below a previous low.

An engulfing candle works in both directions. A bullish engulfing appears after a decline: a rising body covers the previous falling body. A bearish engulfing candle appears after an advance: a falling body covers the previous rising body. The rules are mirrored – entry, stop and target swap sides.

• Piercing line – the rising candle closes above the midpoint of the falling body but does not cover all of it. A weaker version of the same idea.
• Bullish harami – the opposite arrangement: a small rising body sits inside the previous large falling body.
• Morning star – a three-candle reversal with a small candle between the falling and the rising one.
• Hammer – a one-candle reversal with a long lower wick. On a higher timeframe the two candles of a bullish engulfing often merge into a hammer.

• No decline before it – in a sideways range bodies cover each other all the time and mean little.
• Comparing wicks instead of bodies – the definition is about the bodies, open to close.
• Tiny candles – when both candles are small, the pattern shows a quiet market, not a shift in control.
• Buying into resistance – an engulfing candle that closes right under a strong level leaves little room for the trade.
• Moving the stop closer after a very large engulfing candle – the low of the pattern is the level that cancels the idea. Reduce the position size or wait for a pullback instead.