How to Make Money Trading with Candlestick Charts

Bullish Engulfing signal
The signal is formed when a subsequent

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white body completely engulfs the previous
black body.

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Criteria
In order for the bullish engulfing signal to be
valid, the following conditions must exist:
The stock must have been in a definite
downtrend before this signal occurs. This
can be visually seen on the chart.
The second day of the signal should be
white and the body should completely
engulf the previous day’s black candle
body. Even if the first day is a Doji
(described in 
Chapter 3
), it is still a
bullish engulfing signal.
Why the Reversal Works

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Consider a stock which has been steadily
moving down. The investors in the stock are
getting nervous when they see red on their
screen day after day. They hope the stock
will somehow turn around. After days of
continued anguish, the investors cannot take
it anymore. They now convince themselves
to get out of the stock. Where do most
investors sell? At the bottom! This creates
the long dark candle of the first day. Because
of the huge selling pressure, the stock gaps
down on the open the second day, below the
close of the previous day. But now smart
money moves in. The supply is absorbed by
the demand. The stock finally closes above
the open of the previous day, thus creating
the white engulfing candle. The bulls have
now taken over. The bulls have shown

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tremendous strength, which does not go
unnoticed by the bears. The trend has a high
probability of reversing at this point.
Strong as the signal is in itself, the following
conditions make it more probable that the
trend has reversed:
The first day’s dark candle body is very
long compared to other candles in the
current downtrend.
There is a spike in volume on either of
the two signal days.
The first dark candle has gapped down
from the previous trend. This shows the
desperate need for the remaining panic
sellers to get out of the stock.

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Stochastics are in oversold condition.
The second day’s white body engulfs
more than one black candle from the
previous trend.
Figure 6.2
shows a chart of Essar Oil.
Notice the stock gapped down two days
prior to the big white engulfing candle. Also
notice that the white candle engulfed the two
prior black candles, lending significant force
to the reversal. As a trader, this is what you
want to buy into. Remember, always buy into
strength.

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Figure 6.2: