Detecting Bullish Engulfing Candlestick Pattern in Pine Script

Overview of Bullish Engulfing Candlestick Pattern

The Bullish Engulfing Candlestick Pattern is significant in technical analysis, indicating a potential reversal from a bearish to a bullish market trend. It’s observed in the price charts of financial securities like stocks, currencies, commodities, and indexes. Here’s an overview of its key aspects:

Formation and Structure:

The pattern consists of two candlesticks.
The first is a smaller bearish candle, with the closing price lower than the opening price.
The second is a larger bullish candle that ‘engulfs’ the body of the first candle. Its opening price is lower than the first candle’s closing price, and its closing price is higher than the first candle’s opening price.

Importance in Technical Analysis

Trend Reversal Signal: The Bullish Engulfing pattern is primarily valued for its ability to signal a potential reversal of a downtrend. This makes it a critical tool for traders and investors looking to identify turning points in the market.

Psychological Insight: This pattern provides insight into market psychology. The transition from a smaller bearish candle to a larger bullish candle indicates a strong shift in sentiment from pessimism to optimism among market participants.
Easy Identification: Compared to many other technical analysis patterns, the Bullish Engulfing pattern is relatively straightforward to identify. This ease of recognition makes it accessible to both novice and experienced traders.
Flexibility Across Timeframes: The pattern can be identified in various time frames, from short-term charts like minutes and hours to long-term charts like days, weeks, or months. This versatility allows it to be used by a wide range of market participants, including day traders, swing traders, and long-term investors.
Complement to Other Analysis Tools: It is often used in conjunction with other technical analysis tools, such as trend lines, support and resistance levels, moving averages, and indicators. This combination enhances decision-making and increases the reliability of the pattern.

Example From Trading View

Defining the Bullish Engulfing Candlestick Pattern Criteria

Preceding Trend: The pattern should appear after a downtrend or a significant decline in the asset’s price.
First Candlestick: The first candlestick is bearish, with its closing price lower than its opening price. It can vary in size but is typically smaller compared to the second candle.
Second Candlestick: The second candlestick is bullish. It opens at or below the closing level of the first candlestick. Importantly, it closes above the opening level of the first candlestick, effectively ‘engulfing’ the body of the first candle.
Engulfing Nature: The body of the second candlestick must completely cover or engulf the body of the first candlestick. This does not include the wicks or shadows of the candles.
Relative Size: The second candlestick should be visibly larger than the first, indicating a strong shift in market sentiment.

Code For Detecting Bullish Engulfing

// @version=5
indicator("Basic Engulfing Candles", overlay=true)
// Define the Bullish Engulfing Pattern
bull_ec = close[1] < open[1] and open <= close[1] and close >= open[1]
// Plotting the pattern on the chart 
plotshape(bull_ec, style=shape.triangleup, location=location.belowbar, color=color.green, title="Bullish EC")

Output

Overview of the script

1. Define Indicator Settings:

indicator("Basic Engulfing Candles", overlay=true)

This line of code defines a new indicator titled “Basic Engulfing Candles”. The overlay=true part means that this indicator will be displayed directly on the main chart, overlaying the price data.

2. Define the Bullish Engulfing Pattern:

bull_ec = close[1] < open[1] and open <= close[1] and close >= open[1]

This line of code defines the criteria for a Bullish Engulfing Candle pattern. The pattern is identified based on the relationship between the opening and closing prices of the current and previous candles.

close[1] < open[1]: Checks if the previous candle was a bearish candle (its closing price was lower than its opening price).
open <= close[1]: Ensures that the opening price of the current candle is less than or equal to the closing price of the previous candle.
close >= open[1]: Ensures that the closing price of the current candle is greater than or equal to the opening price of the previous candle.

Together, these conditions confirm a Bullish Engulfing pattern, where a smaller bearish candle is followed by a larger bullish candle, suggesting a potential reversal from a downtrend to an uptrend.

3. Plotting the Pattern on the Chart:

plotshape(bull_ec, style=shape.triangleup, location=location.belowbar, color=color.green, title="Bullish EC")

This line of code is used for plotting the identified Bullish Engulfing Candle pattern on the chart.

plotshape(): This function is used to plot a shape on the chart whenever the conditions inside it are true.
bull_ec: The condition we defined earlier for the Bullish Engulfing Candle pattern. Whenever this condition is true, a shape will be plotted.
style=shape.triangleup: This sets the shape to be a triangle pointing upwards.
location=location.belowbar: Places the shape below the candle bar on the chart.
color=color.green: The color of the shape will be green, typically indicating a bullish sentiment.
title="Bullish EC": Sets the title of the shapes plotted as “Bullish EC”.

Frequently Asked Questions

What does the bull_ec variable represent in the code?

The bull_ec variable is a boolean (true/false) condition that determines whether a Bullish Engulfing Pattern is present. It checks specific criteria related to the open and close prices of the current and previous candlesticks to identify this pattern.

Why is overlay=true used in the indicator function?

The overlay=true parameter ensures that the indicator (in this case, the Bullish Engulfing Pattern) is plotted directly on the main price chart. Without this parameter, the indicator might appear in a separate panel below the chart, which isn’t ideal for a pattern that needs to be visualized in context with the price action.

How does the script determine a bearish candle from the previous trading session?

The script identifies a bearish candle from the previous session by checking if the closing price (close[1]) of the previous candle is lower than its opening price (open[1]). This is a standard definition of a bearish candle in candlestick charting.

What is the significance of the plotshape function in this script?

The plotshape function is used to visually represent the occurrence of the Bullish Engulfing Pattern on the chart. It plots a shape (in this case, an upward-pointing triangle) whenever the pattern’s criteria are met, making it easier for users to identify the pattern at a glance.

Can the color or shape of the indicator be changed in the script?

Yes, the color and shape used to indicate the Bullish Engulfing Pattern can be easily changed in the script. This is done by modifying the parameters in the plotshape function. For example, changing color=color.green to another color, or style=shape.triangleup to another shape style like shape.circle or shape.arrowup.

Conclusion

The Bullish Engulfing Candlestick Pattern is a powerful tool in the arsenal of technical analysis, offering a visual representation of market sentiment shifts. Its significance lies in its ability to signal potential reversals from bearish to bullish trends, aiding traders and investors in making informed decisions. The simplicity of its structure a small bearish candle followed by a larger bullish one engulfing the first makes it easily identifiable, enhancing its appeal to a broad spectrum of market participants.