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How to use bullish and bearish engulfing patterns
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We have previously discussed Dojis, inverted hammers and shooting stars.
In this post, we'll look at bullish and bearish engulfing candlestick patterns.
These two common patterns often precede major trend reversals, so it’s important to know how to identify and act on them as part of your cryptocurrency trading strategy.
What is a bullish engulfing pattern?
A bullish engulfing pattern occurs at the bottom of an established downtrend.
It consists of a bearish red candle followed by a bullish green candle whose body “engulfs” the body of the preceding red candle, like so:
From a market psychology perspective, a bullish engulfing candlestick pattern indicates that bears were able to push price lower in the green candle.
However, at some point in the trading session, bulls took complete control and pushed price upward past the open (or high) of the red candle.
What is a bearish engulfing pattern?
A bearish engulfing pattern is the exact opposite of its bullish sibling.
Instead of appearing at the bottom of downtrend, a bearish engulfing pattern occurs at the top of an established uptrend.
A bearish engulfing pattern consists of a green candle engulfed by a subsequent red candle, like so:
As you can see, bulls are able to push price higher during the red candle before experiencing a major bearish push to the downside.
As bulls lose strength, bears are able to emphatically close the candle lower than the preceding green candle’s opening (or low) price.
Examples of bullish and bearish engulfing patterns
On this 4-hour XRP/USD chart, you can see a bullish candle that engulfs both of the preceding red candles.
The bullish engulfing candle is followed by another large green candle that indicates strong buy-side demand. Over the next 36-48 hours, XRP moves from USD0.262 to USD0.285 for an 8.7% gain.
The ETH/USD 1-day chart below shows a bearish engulfing candle.
After a strong upward move from USD550 to USD975, a large red candle that completely engulfs the preceding green candle can be observed.
Following the bearish engulfing candle, ETH drops from USD975 to a low of USD475 for an impressive 53% gain for shorters.
Notice how in this case, the bearish engulfing candle isn’t immediately followed by another red candle in the next trading session.
Instead, ETH/USD prints a green candle, which is followed by yet another red engulfing candle.
In situations like these, aggressive traders may enter a short position following the first bearish engulfing candle, while conservative traders may wait for successive bearish candles before entering a trade.
Bullish and bearish engulfing patterns are great trend reversal indicators.
Since engulfing patterns are typically high-volume events, finding confluence with volume and RSI indicators can often lead to favorable trade entries.