Think of candlestick patterns as the language of the market and the engulfing pattern as one of the most forceful command words in the language. You can’t afford to trade the markets without understanding the language, especially the important words like the engulfing pattern.
What is the engulfing candlestick pattern?
The engulfing candlestick pattern is a 2-candlestick pattern where the second price bar completely engulfs the first one. It is usually formed after an upward or downward price swing. So, the first candlestick is in the direction of the price swing preceding it, while the second candlestick is in the opposite direction. In essence, the engulfing pattern is a reversal candlestick pattern.
Identifying the two forms of the engulfing candlestick pattern
The engulfing candlestick pattern is of two types:
- The bullish engulfing pattern
- The bearish engulfing pattern
The bullish engulfing pattern
The bullish engulfing pattern is characterized as follows:
- The first candlestick has a smaller body and is bearish, being a continuation of the downward swing that precedes it
- The second candlestick is bullish and completely engulfs the first one
Here’s how the pattern looks:
The significance of the bullish engulfing bar pattern is simple: it indicates that the selling pressure that has been dominating the market has waned and buyers are beginning to dominate the market. The first price bar’s smaller body indicates a declining selling power while the engulfing bar shows an increasing buying power.
Whether the pattern occurs at the end of a downtrend or a downward swing in an uptrend or a range-bound market, it indicates a potential bullish reversal. Take a look at the example below:
You can see how the market changed direction after a bullish engulfing pattern formed at the end of that downward price swing. However, it is not recommended to trade the market using this price action pattern alone: be sure to consider other factors of confluence to know whether the pattern forms a high-probability setup.
The bearish engulfing pattern
The two candlestick patterns that make up the bearish engulfing pattern are characterized as follows:
- The first candlestick has a smaller body and is usually bullish, being a continuation of the preceding upward price swing
- The second body completely engulfs the previous one
Take a look at the illustration below:
The bearish engulfing pattern is quite significant when it occurs at the right place. It tells you that the bullish pressure that has been dominating the market has waned and sellers are beginning to dominate the market. The first price bar’s smaller body indicates a declining buying power, while the engulfing bearish bar shows an increasing selling power.
The pattern occurs at the end of a downtrend, a downward swing in an uptrend, or the downswing in a range-bound market, but it often indicates a potential bearish reversal. Take a look at the example below:
You can see how the market changed direction after a bearish engulfing pattern formed at the end of that upward price swing. The pattern shows that sellers are trying to push the market down.
However, you should never trade the market using this candlestick pattern alone: always consider other factors of confluence to know whether the pattern forms a high-probability trade setup or not.
Now that you have learned what the bullish and bearish candlestick patterns look like, why not open your charts and try to identify the patterns?
How to trade the engulfing candlestick patterns
The engulfing pattern should never be traded alone. It has to be combined with other factors of confluence, such as the trend, support/resistance level, and possibly, reversal chart patterns. For many traders, a combination of the engulfing pattern with any two of these factors of confluence can make a good trade.
Trading the engulfing with the trend and key levels
While the market trends only about 25% of the time, it offers great opportunities whenever it does trend. Interestingly, we can use the engulfing candlestick pattern to find high-probability trades when it forms at the right levels.
First, let’s look at a down-trending market where sellers dominate. Our aim is to trade in the direction of the trend. As you know, the price moves in waves: an impulse wave in the direction of the trend and a retracement wave (pullback) in the opposite direction.
So, at the end of a retracement move, we look for a bearish engulfing pattern that indicates the beginning of a new impulse wave. See the chart below:
You can see that the bearish engulfing pattern formed when the price retraced to a key level where the price had reversed in the past. In this case, we have a confluence of a downtrend, a key resistance level, and a bearish engulfing pattern.
Now, let’s look at an up-trending market where the buyers are in control. Our aim is to trade the impulse wave to the upside if a bullish engulfing pattern appears at the end of a retracement, indicating an upward reversal. See the chart below:
Trading the engulfing pattern with a reversal chart pattern and support/resistance level
About 75% of the time, the market does not trend, but we can still trade the upward and downward waves if the engulfing pattern forms around an important support or resistance level. See the EUR/USD H4 chart below:
The market was moving sideways, swinging up and down from key support and resistance levels respectively. In such markets, we trade only from those levels when we see an engulfing pattern, as in the chart above where a bearish engulfing pattern formed at a resistance.
See another example in the GBP USD H4 the market below:
Here, a bullish engulfing pattern formed when the price reached a support level, indicating that buyers were ready to push the price upward. Please note what we’ve discussed here is just the basics; you will learn what differentiates winners from losers in my trading course.
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