Is the Bullish Engulfing Pattern actually good? Should you put your money on the Bullish
Engulfing Candlestick Pattern? Well, to find out, why don't we test the Bullish Engulfing
Pattern one hundred times, just like we tested other trading strategies multiple times on
this channel. Check them out, and subscribe to the Trading Rush Channel, because the last
thing we want to do as a trader, is trade on a strategy the doesn't work in the long
run.
The bullish engulfing pattern is a two candlestick pattern, where a small red candle is followed
by a big green candle that completely engulfs the body of the previous red candle. Bullish
engulfing is a reversal pattern, and it is used to find the reversal in a down trend.
In simple words, the bullish engulfing pattern is mostly used to find the entry and exit
in a trading strategy. Now, some traders who trade on daily and higher timeframes, like
to trade using the candlestick patterns alone. But why is this candlestick pattern so popular
and trusted by many traders? Well, to understand that, we will first have to understand how
the engulfing patterns work.
Since candlestick patterns are watched closely on the daily timeframe, let's say on the daily
timeframe, a stock or a forex pair made new lower lows four days in a row. Most people
who trade on the daily timeframe will see this as a strong selling pressure. The people
who were selling are happy, and many buyers are not ready to buy after sellers took over the
market 4 days in a row.
Now if a green candle opens at or below the closing price of the previous red candle,
and manages to close above the opening price of previous red candle, it will indicate a
lack of selling pressure on that day. It means that the sellers who were selling for 4 days
in a row, are no longer interested in selling, and the buyers are more interested in buying.
When this happens, the next few candles that follow will have a higher probability of moving
higher. Now remember, the bullish engulfing pattern is a short term pattern. What this
means is, when the bullish engulfing pattern occurs, price has a higher chance of moving
upwards for a short time period. That's why it is usually used as an entry signal pattern
in a trading strategy that can predict long term trend direction.
For example, let's say in an uptrend, you are waiting for the price to touch your support
area. Now if the price touches your support area, you cannot immediately buy as there
has to be a reversal confirmation. So instead of risking your money immediately, you wait
and take a long trade when the bullish engulfing pattern appears.
Now everyone is going to use the bullish engulfing pattern differently with their different trading
strategies, but what I wanted to find out, was how good of a pattern the bullish engulfing
pattern really is on its own.
Since candlestick patterns are short term trading patterns, there are traders on daily
and higher timeframes, who hold the stock or a forex pair only for the next 1 or 2 candles.
So to find out how many times the price actually went up the next day after the engulfing pattern,
I tested the Bullish engulfing pattern 100 times, and here's what happened.
Number 1. I added the 200 period moving average to filter false signals, and even though the
bullish engulfing pattern is a reversal candlestick pattern, many people will use it in the strong
trend to find the reversal of a pullback. When the price movement was not choppy,
the price did go in the upward direction on the next day.
Number 2. The probability of price reversing is higher, when the engulfing pattern occurs
after more than 4 red candles in a row. Furthermore, the price has a higher probability of making
a big move in the upward direction, if the volume of the green candle is higher than
average. You can check the Volume Trading video on the Trading Rush channel to learn
more about volume and how it can make you more money. But sometimes price can make big
move when the volume rises. This can sometime lead to very big stoploss. If you find yourself
in a position where the bullish engulfing candle is too big, it is a good idea to skip
that trade as the candle has already made a big move in the upward direction. Also,
candle stick patterns don't tell you where to put your profit target, and since the candle
stick patterns are short term patterns, getting a higher reward to risk ratio trade can be
difficult. But if you can identify a strong support level in an uptrend, and take trade when
the engulfing pattern occurs, you can achieve higher reward to risk ratios.
Number 3. In an engulfing pattern, price only has to cover the body of the previous red
candle, but if the engulfing candle covers the entire candle including the wick, the
probability of the price making an upward move after the bullish engulfing pattern is
a lot higher. So if you only take trades on bullish engulfing patterns, where the pattern
is formed after 4 or more red candles, and the volume on the engulfing candle is higher
than average, and if the engulfing candle is also covering the wick of the previous
candle, you will have a higher chance of making a profit.
Number 4. Now remember, I tested this pattern on the daily timeframe and with the 200 period
moving average. When we will use the bullish engulfing pattern with other trading strategies,
for example with the alligator indicator or with the support and resistance areas, the
win rate of this will be much higher than what we will get here. If we get a profitable
win rate in this backtest, there is a higher chance that the bullish engulfing pattern
will work even better, when combined with another profitable strategy. For backtesting,
I'm using the Official Trading Rush App. It calculates win rate, profit graph, number
of winners and losers in just one click. You can download it from the link in the description
or from the Play Store, and use it to test and see how good the bullish engulfing pattern
works when combined with your own trading strategy. If you don't have a working trading
strategy, check out other videos on the Trading Rush channel, you will probably find a strategy
that suits your needs.
So after backtesting the bullish engulfing candlestick pattern 100 times, here's what
I found out. It is said that the price on the next day on the daily timeframe, will
make an upward move after an engulfing pattern occurs. And during this backtest, 54 out of
100 times, the price did make a move in the upward direction. It made an upward move 8
times in a row, and failed to do the same 5 times in a row. What this means is that
if you combine the bullish engulfing candlestick pattern with a decent trading strategy that
shows the long term trend direction, you will have a powerful entry or exit signal
generator. The win rate I got here is the approximate win rate, and as we have seen
after taking 10000 virtual trades in the "why I test strategies 100 times video", we don't
need the accurate win rate to find if a strategy works or not. We only need the approximate
win rate and money management will do the rest. After testing 100 times, we found that
the bullish engulfing candlestick pattern is a profitable candlestick pattern.
That's all. Like the video if you liked it. Subscribe and ring that notification bell
to see more candlestick patterns tested 100 times, because you don't want to use a candle
pattern or a strategy that does not work in the long run. And thank you so much for
supporting the Trading Rush channel on Patreon. Have a Great Day.