The Engulfing pattern is one of the most powerful and reliable candlestick patterns in technical analysis. It consists of two candles where the second candle completely engulfs the body of the first. This pattern signals a strong shift in market sentiment and often marks the beginning of significant price reversals.
What is an Engulfing Pattern?
An Engulfing pattern is a two-candlestick reversal pattern where the second candle's body completely covers or "engulfs" the body of the first candle. There are two types: Bullish Engulfing (signals upward reversal) and Bearish Engulfing (signals downward reversal).
Key Concept: The engulfing candle's body must completely cover the previous candle's body. The shadows (wicks) do not need to be engulfed, only the real body (open to close range).
Bullish Engulfing Pattern
A Bullish Engulfing pattern appears at the bottom of a downtrend and signals a potential reversal to the upside.
Formation Requirements
- First candle: A bearish (red) candle showing continued selling
- Second candle: A bullish (green) candle that opens below the first candle's close and closes above its open
- The green candle's body completely engulfs the red candle's body
- Must occur after a clear downtrend
Visual Description
Picture a small red rectangle followed by a larger green rectangle. The green rectangle starts lower than the red one ends and finishes higher than the red one started, completely covering it.
Bullish Engulfing Example
Stock XYZ has fallen from $50 to $40 over two weeks.
Day 1: Opens at $41, closes at $40 (small red candle)
Day 2: Opens at $39.50 (gap down), but buyers step in. Closes at $42 (large green candle)
The green candle engulfs the previous day's red candle, signaling a bullish reversal.
Bearish Engulfing Pattern
A Bearish Engulfing pattern appears at the top of an uptrend and signals a potential reversal to the downside.
Formation Requirements
- First candle: A bullish (green) candle showing continued buying
- Second candle: A bearish (red) candle that opens above the first candle's close and closes below its open
- The red candle's body completely engulfs the green candle's body
- Must occur after a clear uptrend
Visual Description
Picture a small green rectangle followed by a larger red rectangle. The red rectangle starts higher than the green one ends and finishes lower than the green one started, completely covering it.
Bearish Engulfing Example
Stock ABC has rallied from $60 to $80 over three weeks.
Day 1: Opens at $79, closes at $80 (small green candle)
Day 2: Opens at $81 (gap up), but sellers take control. Closes at $77 (large red candle)
The red candle engulfs the previous day's green candle, signaling a bearish reversal.
Psychology Behind Engulfing Patterns
Bullish Engulfing Psychology
- Downtrend continues with another bearish day
- Next day opens even lower, creating hope for sellers
- Buyers suddenly overwhelm sellers throughout the session
- Price closes above the previous day's open, trapping shorts
- Trapped shorts must cover, fueling further upside
Bearish Engulfing Psychology
- Uptrend continues with another bullish day
- Next day opens even higher, creating hope for buyers
- Sellers suddenly overwhelm buyers throughout the session
- Price closes below the previous day's open, trapping longs
- Trapped longs must sell, fueling further downside
How to Trade Engulfing Patterns
Trading Bullish Engulfing
Bullish Engulfing Trade Setup
Entry: Buy on the close of the engulfing candle or on a break above its high
Stop loss: Below the low of the engulfing pattern
Target: Previous resistance level or 2:1 risk/reward
Alternative entry: Wait for a pullback to the engulfing candle's close
Trading Bearish Engulfing
Bearish Engulfing Trade Setup
Entry: Short on the close of the engulfing candle or on a break below its low
Stop loss: Above the high of the engulfing pattern
Target: Previous support level or 2:1 risk/reward
Alternative entry: Wait for a rally back to the engulfing candle's close
Factors That Increase Pattern Reliability
Size of the Engulfing Candle
- Larger engulfing candles are more significant
- The bigger the body relative to the first candle, the stronger the signal
- Engulfing candle should be larger than average daily range
Volume Confirmation
- Higher volume on the engulfing candle increases reliability
- Volume should be above average, ideally 50%+ higher
- Low volume engulfing patterns are less trustworthy
Key Price Levels
- Bullish engulfing at support = stronger signal
- Bearish engulfing at resistance = stronger signal
- Patterns at moving averages add significance
Preceding Trend Strength
- Stronger preceding trends make reversals more significant
- Extended trends increase likelihood of reversal working
- Weak or choppy trends reduce pattern reliability
Engulfing Pattern Variations
Perfect Engulfing
The ideal pattern where the engulfing candle completely covers not just the body but also the shadows of the previous candle. This is the strongest form.
Outside Day
When the engulfing candle's high and low both exceed the previous candle's range. This combines an engulfing pattern with an outside bar.
Multiple Candle Engulfing
Sometimes the engulfing candle covers two or more previous candles. This shows even stronger momentum and conviction.
Common Mistakes to Avoid
- Trading in ranges: Engulfing patterns work best after clear trends, not in sideways markets
- Ignoring context: Always check if the pattern occurs at meaningful price levels
- Small engulfing candles: If the engulfing candle is barely larger, the signal is weak
- Tight stop losses: Place stops beyond the pattern's extreme, not just beyond the body
- Lower timeframes: Engulfing patterns on 1-5 minute charts generate many false signals
Engulfing Pattern Statistics
Based on historical studies:
- Bullish Engulfing reversal rate: 63-67%
- Bearish Engulfing reversal rate: 62-66%
- With volume confirmation: 68-72% success rate
- At key support/resistance: 70-75% success rate
Engulfing patterns are among the most reliable candlestick patterns, especially when combined with other technical factors.
Combining Engulfing Patterns with Indicators
RSI Confirmation
- Bullish engulfing + RSI oversold (below 30) = stronger buy signal
- Bearish engulfing + RSI overbought (above 70) = stronger sell signal
Moving Average Context
- Bullish engulfing bouncing off 50 or 200 MA = high probability
- Bearish engulfing rejecting at key moving average = high probability
MACD Divergence
- Bullish engulfing with bullish MACD divergence = stronger signal
- Bearish engulfing with bearish MACD divergence = stronger signal
Track Your Engulfing Pattern Trades
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Summary
Engulfing patterns are powerful two-candlestick reversal signals. Bullish Engulfing patterns appear at downtrend bottoms when a large green candle completely covers the previous red candle's body. Bearish Engulfing patterns appear at uptrend tops when a large red candle covers the previous green candle's body. For best results, trade engulfing patterns after clear trends, at key support/resistance levels, with volume confirmation. The larger the engulfing candle and the stronger the preceding trend, the more reliable the signal.
Learn more: Morning Star pattern and Evening Star pattern.