In this article:
- What is a candlestick?
- What is a reversal pattern?
- What is a bullish engulfing pattern?
- Example of a bullish engulfing pattern
- What is a bearish engulfing pattern?
- Example of a bearish engulfing pattern
- The concept of candlestick addition
What is a Candlestick?
Just as we have a line chart, area chart, bar chart, a candlestick is also a type of chart. But, this chart has some special qualities and that’s the reason it is preferred by most traders. So the special quality of a candlestick is that it displays the open, high, low and close prices of a stock. It is named candlestick because it resembles to a real candle with a wick.So, a candlestick consists of two major things.- The body of the candle
- The wick of the candle
But again you might wonder, what is a reversal pattern?
A reversal pattern indicates that a particular trend is coming to an end. When a reversal pattern appears during an uptrend, it indicates that there is a bearish reversal and vice-versa.Today we are going to discuss two types of reversal patterns.- A bullish engulfing pattern
- A bearish engulfing pattern
Bullish Engulfing Pattern
First, let’s discuss a bullish engulfing pattern. Take a look at the pair of candlesticks below and try to understand what it represents?Variation one:
In the above image, the green bullish candle completely engulfs the body of the previous three candles.Variation two:
Opposite to the previous illustration, here one bearish candle is engulfed by following three bullish candles. This is another type of bullish engulfing pattern.Variation three:
In this image, a small bearish candle is there in the middle of a big bearish and big bullish candle. The small bearish candle doesn’t matter if it appears in the middle of the body of the previous bearish candle. If the bullish candle is able to engulf the body of the bearish candles formed, it is a valid bullish engulfing pattern.Interpretation of a Bullish Engulfing Candle
To form an engulfing pattern there has to be a prior ongoing trend. In this case, the trend should be a downtrend. The price of the share keeps moving down until we see a bullish candle (green candle) which engulfs the previous bearish candle (red candle).The bullish engulfing candle is formed when the share opens lower than the previous trading session and closes higher than the previous close.So, before a bullish engulfing pattern is formed, the traders anticipate that the price of a share is going to fall and they sell the shares. With low buying pressure, we see a formation of multiple bearish candles. When the share is close to the support levels, traders feel that the share is undervalued and is the right opportunity to buy. With high buying pressure, the share price bounces back which engulfs the previous candle.So, the bullish engulfing pattern indicates that the market participants are no longer in favour of the bearish trend and the bulls are back in full power.Real-life Examples of Bullish Engulfing Pattern.
Bullish engulfing pattern formed in Mahindra and Mahindra Financial Services Ltd
The stock was in a downtrend from 15th February 2021 to 20th August 2021. The candle formed on 21st August 2021 with an open of Rs. 139.55 and a close of Rs. 145.45 was engulfed by a bullish candle on 22nd August 2021 with an open of Rs. 146.40 and a close of Rs. 139.45.The stock was trading above the engulfing pattern for the next two to three days which was a confirmation that there has been a reversal. Since then the stock has been in an up move of 48.98%.
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