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Two Candlestick Pattern - Bullish Engulfing

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A bullish engulfing pattern is a candlestick pattern that forms when a small Red candlestick is followed the next day by a large Green candlestick , the body of which completely overlaps or engulfs the body of the previous day’s candlestick .

Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks .

Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks .

Limitations -
A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend; however, they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don't provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

Important Points-

The Green candlestick of a bullish engulfing pattern typically has a small upper wick, if any. That means the stock closed at or near its highest price, suggesting that the Candlestick Closed while the price was still surging upward.

This lack of an upper wick makes it more likely that the next candlestick will produce another Green candlestick that will close higher than the bullish engulfing pattern closed, though it’s also possible that the next day will produce a Red candlestick after gapping up at the opening. Because bullish engulfing patterns tend to signify trend reversals, analysts pay particular attention to them.

{Source - Investopedia.com}

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