The engulfing candlestick pattern is a popular and effective tool forex traders use to identify potential trend reversals in the market.
By identifying and trading this pattern, traders can gain confidence in their trading decisions and potentially increase their profits.
This guide will explore the basics of the engulfing candlestick pattern and provide tips for successfully trading it.
Identifying the Engulfing Candlestick Pattern
The engulfing candlestick pattern is a dual candlestick pattern; it consists of two candlesticks. In the forex market, there is a constant battle between bulls and bears (buyers and sellers).
This candlestick pattern allows traders to know when buyers or sellers are in control of the market. A typical engulfing pattern looks like this:
The smaller candle is called the “engulfed candle,” while the larger candle is regarded as the “engulfing” candle.
Additionally, traders should look beyond the engulfing candle before executing orders. If the subsequent engulfing pattern is another strong bullish candle, this greatly increases the accuracy of the pattern.
This is shown in the image that follows.
Types Of Engulfing Candlestick Patterns
There are two types of engulfing candlestick patterns, namely;
- Bullish engulfing pattern
- Bearish engulfing pattern
Bullish Engulfing Pattern
The bullish engulfing pattern is a two-candlestick reversal pattern that shows that a strong upward move might occur. It happens when a bearish candle (black or red) is immediately followed by a larger bullish candle (white or green).
As seen above, the second candle “engulfs” the bearish candle. This means buyers currently control the market, and higher pricing is imminent.
What Does The Bullish Engulfing Candle Stick Pattern Mean?
A bullish engulfing pattern forms at the end of a downtrend. It forms when a bearish candle is engulfed by a larger bullish candle, indicating a possibility of higher pricing.
The pattern is more reliable when the second candle closes well above the body and wick of the initial candle.
Also, traders must wait for the second candle to close before executing short orders. Then, stop loss will be placed at the pattern’s high as a collective.
Lastly, the market’s overall trend and momentum must be considered before entering any position. In a strong upward trend, any bearish engulfing pattern formed should be ignored.
However, after a pullback in a downtrend, a bearish engulfing pattern can be used as an entry for further downward pricing.
Bearish Engulfing Pattern
A bearish engulfing pattern is a two-candlestick reversal pattern that takes the price of currency pairs lower. The pattern consists of a bullish candle (white or green) followed by a large bearish candle (black or red) that “engulfs” the smaller bullish candle.
This shows that bears are currently in control of the market; lower prices will be achieved soon.
What Does Bearish Engulfing Candlestick Pattern Mean?
A bearish engulfing pattern forms at the end of some upward price moves. It is identified by the first bullish candle being engulfed by a larger bearish candle indicating a shift towards lower prices.
The pattern is only valid when the second candle closes well above both the body and wick of the initial candle.
Also, traders must wait for the second candle to close before executing short orders. Then, stop loss will be placed at the pattern’s high as a collective.
Lastly, the market’s overall trend and momentum must be considered before entering any position. In a strong upward trend, any bearish engulfing pattern formed should be ignored.
However, after a pullback in a downtrend, a bearish engulfing pattern can be used as an entry for further downward pricing.
Confirming The Engulfing Patterns With Other Technical Indicators
While the engulfing candlestick pattern can be a powerful tool on its own, you can increase your confidence in the pattern by confirming it with technical indicators.
For example, you can look for the pattern to occur near a key support or resistance level,
or use indicators like the Relative Strength Index (RSI) or Moving Average Convergence Divergence (MACD) to confirm the pattern.
By combining the engulfing pattern with other technical analysis tools, traders can make more informed trading decisions and potentially increase their profits.
Setting Stop Loss and Take Profit Levels.
When trading the engulfing candlestick pattern, it’s vital to set stop loss and take profit levels to manage risk and maximize potential profits.
Stop loss levels should be set below the low of the engulfing candle, while take profit levels can be set at a predetermined target or based on the distance between the entry point and stop loss level.
Traders should also consider adjusting their stop loss and take profit levels as the trade progresses and the market conditions change.
Engulfing candles are read from the left of the chart. A small bullish candle followed by a large bearish candle indicates a bullish engulfing pattern.
While a small bearish candle followed by a large bullish candle indicates a bearish engulfing pattern.
The engulfing pattern works when utilized properly. For instance, a bullish engulfing should only be traded when formed after a pullback of an uptrend and not during a down-trending market.
Furthermore, the second candle of the pattern has to be distinctly larger than the first. This indicates that strong hands are present in the market.
As a general rule, the body of the engulfed candlestick (large candle) has to close above the body and the wick of the engulfed candlestick (small candle).
Further reading:
Summary: Bullish And Bearish Engulfing Candlestick Pattern- Tutorial
All things considered, the engulfing candlestick pattern is a good indication to gauge market strength. However, using it alone is not sufficient for a trading strategy.
Other indicators and patterns can be used alongside it while it’s used as a means of confirmation.
To sum up, these two patterns are opposites of one another and are both indications of reversals.
A bearish engulfing pattern forms after a strong upward move. Likewise, the bullish engulfing pattern forms after a downward move.
These patterns are most probable when they conform with the overall market direction. Furthermore, it has to be ensured that the engulfing candle fully covers the engulfed candle’s body and wick.
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