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Written and copyright © 2008-2009 by Thomas N. Bulkowski. All rights reserved.
In my book,
Encyclopedia of Candlestick Charts  , pictured on the right,
I explore the entire range of candlestick patterns from abandoned babies to windows (not exactly A to Z, but you get the idea), in both bull and bear markets, using almost 5 million candle lines
in the tests.
The book takes an in-depth look at 103 candlestick patterns and reports on behavior and rank (3 types: reversal rate, frequency, and overall performance), identification guidelines,
performance statistics (tables of general statistics, height, and volume), trading tactics (tables of statistics on reversal rates and performance indicators),
and wraps each chapter with a sample trade. I share a sliver of that information below. If you like what you read here, then you will love the book. Help support this website and buy a copy
by clicking on the above link.
The bullish engulfing candlestick is a well-known candle pattern composed of two candle lines. The first one is black and the second is a white one that is taller than the prior black candle,
engulfing it or overlapping the black candle’s body. The bullish engulfing candlestick acts as a bullish reversal 63% of the time, which is respectable, ranking 22 where 1 is best
out of 103 candle patterns. The high frequency rank (12) means that this is as plentiful as children at a playground.
Important Results
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Theoretical performance: Bullish reversal
Tested performance: Bullish reversal 63% of the time
Frequency rank: 12
Overall performance rank: 84
Best percentage meeting price target: 67% (bear market, down breakout)
Best average move in 10 days: -6.31% (bear market, down breakout)
Best 10-day performance rank: 14 (bear market, down breakout)
All ranks are out of 103 candlestick patterns with the top performer ranking 1. "Best" means the highest rated of the four combinations of bull/bear market, up/down breakouts.
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 Bullish Engulfing
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Discussion
The bullish engulfing candlestick, at first glance, appears to perform quite well. It has a reversal rate of 63%. That means price closes above the top of the candlestick pattern
63% of the time. The bad news is that with an overall performance rank of 84, the post breakout performance can be dreadful.
A closer look at the numbers shows that downward breakouts
are where this pattern outperforms. The best move 10 days after an upward breakout is a drop of 1.18%. Usually you would see a rise 10 days after an upward breakout but not in this
candlestick. Thus, if you are going to rely on this candlestick then look for a downward breakout. The best move appears in a bear market, so that is the way to trade this one.
Identification Guidelines
| Characteristic | Discussion |
| Number of candle lines | Two. |
| Price trend leading to the pattern | Downward. |
| Configuration | Look for two candles in a downward price trend. The first is a black candle followed by a taller white one. The white candle should have a close above the
prior open and an open below the prior close. In other words, the body of the white candle should engulf or overlap the body of the black candle. Ignore the shadows. |
Three Trading Tidbits
If you want a few bones from my Encyclopedia of candlestick charts book, here are three to chew on. The pages refer to the book
where the tips appear.
- Bullish engulfing candles that appear within a third of the yearly low perform best -- page 320.
- Select tall candles -- page 320-321.
- Avoid bullish engulfing candles that appear in a downward primary trend -- page x322.
Example
The chart shows a bullish engulfing candlestick circled in red on the daily scale. The first candle is black followed by a white one in which
the body of the white candle covers, overlaps, or engulfs the body of the black candle. Ignore the shadows.
This bullish engulfing candlestick acts as a temporary reversal of the downward price trend. This is also one of the trading setups that I suggest you avoid. Why? Because
the primary trend is downward. The bullish engulfing candlestick reverses that trend, but only for a short time. The primary downward trend takes over and price resumes falling.
Trade bullish engulfing candlesticks when the primary trend is upward. Look for a downward retrace in a rising price trend for the best chance of success.
-- Thomas Bulkowski
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