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.
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.
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 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. But it can’t assist us in locating profit-targets. Thus, when trading the pattern, it can help to combine it with other indicators.
I would prefer to use the majority of candlestick patterns such as the Engulfing Candlestick Pattern on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels, candlestick pattern has been formed or a particular indicator value has been reached.
The Engulfing Candlestick Pattern is just one method of market analysis amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.
Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.
The methods of implementing the Engulfing Candlestick Pattern into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with the Engulfing Candlestick Pattern, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.