What is an Engulfing Candlestick? (Is it Bullish or is it Bearish?)
An engulfing candlestick can represent a reversal of a trend. So what does an engulfing candlestick look like?
The Real Body (the opening and closing price) has to be larger than the previous price bar. Let’s look at an example below:
Use the quick links to jump straight to learn how to spot an engulfing candlestick and how to trade them.
- Is an Engulfing Candlestick Bullish or Bearish?
- How Reliable is a Bullish or Bearish Engulfing Candlestick?
- How to Trade a Bearish or Bullish Engulfing Candlestick
Is an Engulfing Candlestick Bullish or Bearish?
An engulfing candlestick can be both bullish and bearish–it really depends on where price action closes.
To know if it’s a bullish engulfing candlestick, the candlestick needs to have a lower low than the previous candlestick, and the closing price of the candlestick needs to be higher than the previous candlestick.
To know if it’s a bearish engulfing candlestick, the candlestick needs to have a higher high than the previous candlestick, and the closing price of the candlestick needs to close lower than the previous candlestick.
How Reliable is a Bullish or Bearish Engulfing Candlestick?
Engulfing candlesticks are helpful in the sense that it can show a strong downward or upward trend but aren’t super reliable because there are many other factors to determine such as, chart patterns, strong resistance or support levels, and supply & demand zones.
For example, is the price action of a stock near a strong resistance or support level. If you got a bearish engulfing candlestick near a strong support level, it may bounce if a lot of buyers are sitting in those levels. Then it would not make it reliable.
Here’s a live example with $SPY. In the highlighted circle you can see a bullish engulfing candlestick, but it’s also nearing a strong monthly resistance level (blue line).
The price action starts to slowly fall down and not be able to hold that monthly resistance level.
Other indicators to look at is if it’s near a strong supply & demand zone or if it’s forming a chart pattern that is the opposite of bullish or bearish.
How to Trade a Bearish or Bullish Engulfing Candlestick
A potential trading strategy for bullish or bearish engulfing candlestick pattern is to wait for a consolidation candlestick, and see where price action wants to move after.
Let’s look at the at a few examples of a bullish and bearish engulfing candlestick pattern.
How to Trade Engulfing Bullish Reversal
How to Trade Engulfing Bearish Reversal
