The Engulfing Candlestick Pattern signals a possible reversal of the current market trend. It consists of two candles, where the second candle engulfs the first one. A bullish engulfing pattern is a candlestick pattern that forms when a small black candlestick is followed the next day by a large white candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick. On the other hand, a bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that eclipses or “engulfs” the smaller up candle.
What is the Engulfing Candlestick Pattern?
The second candle in the Engulfing Candlestick Pattern is greater in length than the first candle. Both candles can be bearish or bullish, depending on the trend. The second candle closes above the previous candle’s open and opens below the first candle.
Here’s what the Engulfing Candlestick Pattern looks like on a chart.
The Engulfing Candlestick Pattern helps traders look for reversals in the current trend, giving them potential entry points to ride the trend. Also, the Engulfing Candlestick Pattern can provide an exit strategy.
The pattern has two variations; Bullish Engulfing Pattern and Bearish Engulfing Pattern.
Bullish Engulfing Pattern
The bullish Engulfing pattern emerges in a downtrend. It contains a small bearish candle followed by a long bullish candle. It represents that the price open lower than the previous low, but the buying pressure pushes up the price higher than the previous high.
Engulfing candles tend to signal a reversal of the current trend in the market. This specific pattern involves two candles with the latter candle ‘engulfing’ the entire body of the candle before it. The engulfing candle can be bullish or bearish depending on where it forms in relation to the existing trend.
Bearish Engulfing Pattern
The bearish Engulfing pattern occurs in an uptrend. It has a small bullish candle engulfed by a long bearish candle. This pattern shows that the price open higher, but more sellers enter the market and push the price downwards.
How to use the Engulfing Candlestick Pattern?
The bearish and the bullish Engulfing Patterns provide possible trading signals for going long or going short. You could consider going long in a bullish pattern and going short in a bearish pattern.
In the bullish Engulfing Pattern, traders look for not only the two candles forming the pattern, but also the next candles. These candles should be bullish, as this will give us a true signal of a trend reversal. If the candles previous to the Engulfing Pattern are bearish, this is often seen by traders as a strong signal for a reversal trade setup.
An aggressive trader may buy right after the appearance of the Engulfing Pattern. Whereas a conservative trader may wait for a confirmation of a trend reversal. The stop-loss in the bullish Engulfing Pattern could be placed near the low from the pattern.
In the bearish Engulfing Pattern, traders wait for the second candle of pattern to close, and then act on the next candle. Here the traders exit the long position or enter the short position. The stop-loss could be placed near the high from the pattern.
When there is a strong uptrend, traders may decide not to initiate a short trade. Because in this case, even the presence of the bearish Engulfing Pattern may not stop the price advance. If there is a downtrend, and the price sees a pullback to the upside, the bearish Engulfing Pattern could be a better shorting opportunity.
The bearish and the bullish Engulfing Patterns tend to be more reliable from my experience only when there is a clear uptrend or downtrend. I personally dont feel that they work that great in uneven markets. When the price action is choppy, several Engulfing Patterns can appear and can generate false signals.
Engulfing Candlestick Pattern trading strategy
The Engulfing Pattern can describe a continuation/reversal of a trend, but they don’t provide price-targets.
Engulfing candles don’t always have to appear at the end of a trend. When viewed within a strong trend, traders can glean information from the candle pattern pointing towards continued momentum in the direction of the existing trend.
So, for your own forex trading strategies, you could use momentum oscillators or other technical analysis and the Engulfing Patterns.
Engulfing Candlestick Pattern buy strategy
- Look for the pattern in a downtrend.
- Wait for the price bar to go bullish before entering.
- Set a stop-loss near the recent low from the Engulfing Pattern.
- Exit the trade when the price level drops.
Engulfing Candlestick Pattern sell strategy
- Locate the pattern in an uptrend.
- Wait for the price bar to go bearish before entry.
- Set a stop-loss near the recent high from the Engulfing Pattern.
- Exit the trade when the price level rises.
Engulfing Candlestick Pattern conclusion
The Engulfing Candlestick Pattern can be used on your trading platform charts to help filter potential trading signals as part of an overall trading strategy. The Engulfing Pattern can help us define the direction of the trend.
However, as other candlestick patterns, engulfing formations have their own limitations. While they are quite powerful when they occur at the end of a strong trend, they are almost non-tradeable when they appear in choppy trading. They also can’t assist us in locating profit targets or stop loss levels.
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