Bullish Engulfing Explained & Backtested (2024)

The bullish engulfing is a two-bar bullish reversal Japanese candlestick pattern that leads to a more significant bullish move in the crypto and stock markets and a shorter bearish bounce in forex, according to our extensive backtests.

The bullish engulfing pattern loses money in most markets when traditionally traded.

But what if I told you that you could turn this mediocre pattern into a winning trading strategy by listening to the data?

Would you be intrigued?

If so, read on to learn how to trade bullish engulfing candlesticks like a technical analysis samurai warrior.

What Is a Bullish Engulfing Candlestick Pattern?

The bullish engulfing is a two-bar engulfing pattern that supposedly alerts traders of a bearish reversal. 

It gets its name from the second candle that engulfs the first candle in the bullish direction. 

But before we dive into the pitiful past performance of this bullish engulfing pattern (when traded traditionally), let’s learn how to identify it on our candlestick charts.

How to Identify the Bullish Engulfing Candlestick Pattern

The following are the requirements for a valid bullish engulfing pattern:

• The first candle must be red.
• The second candle must be green and engulf the prior candle.
• The bullish engulfing must occur in a downtrend.

Engulfing means that one candle’s open and close fit within the real body of the engulfing candle. The second green candle engulfs the first red candle in bullish engulfing patterns.

We see the bullish engulfing pattern on the Amazon (AMZN) August 26th, 2021, daily chart. Price is in a downtrend as it’s below the 50-day moving average. The second candle is a green candle whose real body is larger than the previous candle’s open and close.

Now that we can identify this supposed bullish reversal pattern, let’s learn how to trade this pattern using data-driven technical analysis.

How to Trade the Bullish Doji Candlestick Pattern

The bullish engulfing is traded optimally in the stock and crypto markets using bullish mean reversion trading strategies expecting a larger bullish bounce and bearish mean reversion strategies in forex anticipating a quick bearish scalp.

But before we learn how to trade this engulfing pattern guided by our backtest data, let’s understand how most technical analysts trade this pattern unprofitably.

Bullish Engulfing Bullish Reversal Trade Setup

Let’s practice identifying this frequently occurring pattern.

The bullish, engulfing candlestick pattern occurred on the Gamestop (GME) daily chart on July 19th, 2021.

The price is in a downtrend as it’s below the 50-day simple moving average. The first candle has a small red body, with the next candle being a large green candle engulfing the prior day’s real body.

Now that the pattern is identified, traders traditionally enter long on a break of the high of the second candle and place a stop loss below the low of the same engulfing candle.

Today was a lucky day for the above Gamestop trader. The trade was profitable, but they’re on the wrong side of history.

So if we want to get history on our side, how should we trade this bullish engulfing pattern?

Bullish Engulfing Bullish Mean Reversion Trade Setup

Let’s practice identifying the bullish engulfing pattern one final time. 

The price is below the 50-day moving average with a bearish candle followed by a large bullish candle engulfing the previous.

With the pattern identified, we wait for the price to cross the pattern’s low, and we enter long when the price moves back above that low, setting a stop loss of one ATR.

Let’s add clarity to this using the daily chart of Apple (AAPL) on February 6th, 2018. We see the pattern low of $38.50 occurring on the second candle. The price moves below and back above the pattern low on February 9th, triggering an entry leading to a very profitable trade.

Bullish Engulfing Bearish Mean Reversion Trade Setup

We see a bearish trend, a bearish candle followed by a bullish engulfing pattern, fulfilling the bullish engulfing candlestick pattern requirements.

Professional crypto and forex traders go short when the price moves up and below the bullish engulfing’s high, setting a stop loss of one ATR.

Let’s use the Euro (EURUSD) chart on July 8th, 2021, in our example.

The engulfing pattern high occurs on the second candle at $1.18678. The price moves above this price the day after pattern identification, alerting traders of a potential future short entry. The next day price moved below the pattern high, triggering an entry that led to a profitable trade.

But how profitable is this bullish engulfing trading strategy? What does history tell us?

Does the Bullish Engulfing Pattern Work? (Backtest Results)

Using the following rules, I backtested the bullish engulfing candlestick pattern on the daily timeframe in the crypto, forex, and stock markets.

• A close above the 50-day SMA constitutes an uptrend.
• I tested risk-reward ranges from 1 to 5. 
• The optimal risk-reward ratio is selected using profit per bar.
• Entry and exits are discussed in the how-to trade section above.
• Confirmation must occur within three days of the pattern signal.

Similar Candlestick Patterns

Multiple candlestick patterns are similar to the bullish engulfing. Understanding the differences between these patterns is essential when using candlestick pattern technical analysis.

Bearish Engulfing vs. Bullish Engulfing

The bearish engulfing candlestick pattern is a mirror image of its bullish sibling. The bearish engulfing pattern occurs in an uptrend, with the first candle being bullish and the second candle turning bear and fully engulfing the first. 

Bullish Harami vs. Bullish Engulfing

The bullish harami candlestick pattern and the bullish engulfing are also highly similar. The only difference between them is the order of their candles. In the bullish harami, the first candle engulfs the second, whereas, in the bullish engulfing, the second candle engulfs the first.

The Bottom Line

The bullish engulfing occurs frequently in all markets tested and supposedly portends a bullish reversal; however, history tells us otherwise. In all markets, the bullish engulfing tells us that volatility is incoming, and the best way to profit from this volatility is to use a bullish mean reversion trading strategy.

Looking to use a data-backed approach to your candlestick trading? Check out the backtest results to learn the best candlestick patterns for day trading.