Depending on their heights and collocation, a bullish or a bearish trend reversal can be predicted. After the engulfing session, wait until another reversal candlestick pattern or signal emerges, increasing the probability of a trend shift. This could take the form of a hammer, shooting star, or another reversal pattern. Be aware that the pattern that reinforces the probability of the reversal may emerge before the engulfing formation as well. The engulfing pattern reflects a shift in market sentiment and potentially a trend reversal. Hence, the pattern should appear in the context of a clearly identifiable trend.

  • If the above setup forms, and there is strong price action visible to you, then you can plan your strategy around the bullish engulfing candlestick pattern.
  • And you can analyze your risk/reward before entering any trade to help you make the right decision.
  • A strong engulfing pattern against the trend can sign a potential trend change.

A bullish engulfing pattern is a white candlestick that closes higher than the previous day’s opening after opening lower than the previous day’s close. In summary, the engulfing pattern trading strategy gives you a chance to trade along with the smart money and profit from trapped retail traders. Most traders will lose money when trading candlestick patterns but with a little bit of twist, you can turn the odds in your favor. And, that’s precisely what our easy guide to trading the engulfing pattern is aiming for.

The second candle is a bearish candle that engulfs the prior day’s bullish candle. Below is a summary of the main differences between the bullish and bearish engulfing patterns. A bearish engulfing candle occurs when the real body of a down candle completely envelops the real body of the prior up candle. A bullish engulfing candle occurs when the real body of an up candle completely envelops the real body of the prior down candle. In short, what makes the bullish engulfing pattern so strong is that the bullish candle manages to push past the preceding bearish candle, despite having opened with a negative gap.

However, by the end of the selected time period, quotes fall below the opening price of the first candle. That is, the body of the second candle engulfs the body of the first candle while trading volumes begin to grow. The most suitable place to put the stop-loss is beyond the extreme zone of the pattern. However, if it is a bullish pattern, you should set the SL beneath the lower candle of the engulfing candlestick. And if it is a bearish Forex pattern, you should set the SL just above the up candle of the engulfing one. Engulfing is a trend reversal candlestick pattern consisting of two candles.

However, that doesn’t keep it from appearing when the trend is strong to the upside or in other conditions. Now, applying the concept of volume to the bullish engulfing pattern could be done in many ways. However, one of the most logical approaches would be to require that the volume for the pattern is higher than the volume of the surrounding bars. High volume shows us that the market performed the bullish engulfing with conviction, which could improve the profitability of the pattern.

What is engulfing candle ? ?

The length of the bearish candle is such that the previous day’s bullish candle is completely engulfed in it, indicating a dramatic reversal. You might prepare to go long in the asset after your trading setup verifies the bullish engulfing pattern. However, due to irregular market behaviour, candlestick patterns can occasionally give erroneous indications. This engulfing pattern is followed by a reversal in the prevailing negative trend, implying that buyers seize control of the market and drive prices higher.

Remembers, following the market, is always following the strength of the candles. Completely deleting all the work that the sellers had to build that previous bearish candle. The pullback should not drop below the low of the prior pullback, as this violates the rules of an uptrend. Also, if you look at the lower timeframe, you’ll likely see a break of structure as the price makes a higher high and lows (another sign of strength from the buyers). So if you trade reversals, always look for a strong momentum move into an area.

Second, the size of the second candle can also be extremely large, which means that a trader who follows the pattern could end up with a very significant stop loss if they choose to do so. Now, the first sign that buying the engulfing pattern is a bad idea was that we didn’t have enough profit margins. In this regard, our goal is to identify price areas where the trading volume is flat. How we interpret the psychology behind the engulfing pattern plays a big role in whether or not the pattern will work out.

Engulfing patterns FAQ

A bullish engulfing pattern is a pattern in which the second ascending candle engulfs the first bearish candle. That is, the bulls show their strength and open large purchases of the asset. If you find yourself in a bearish scenario, then the breakout of the price should be via the bottom of the engulfing candlestick. Otherwise, if you are in a bullish scenario, then the breakout of the price should be via the engulfing candle top.

Engulfing candles multiple uses?

As per the textbook rules, we first need to wait for the second candle of this price formation to close. A close below the low of the first candle shows a stronger bearish signal. This pattern indicates that buying pressure has overcome selling pressure and suggests that the market trend is changing from a downtrend (bearish) to an uptrend (bullish). If you are risk-averse, then you can wait for the confirmation for a couple of days more to confirm the uptrend.

How to spot a bullish engulfing pattern and what does it mean?

I normally use the Bullish engulfing in an uptrend, (similar to MAEE formula), combined with an oversold stochastic for extra confirmation. Now, what this means is that we buy if the volatility level preceding the pattern is quite low. However, we require a significant range expansion on the last bar of the pattern, meaning bullish engulfing strategy that the upward drive of the market seems strong and sound. Another way of trying the improve the pattern is by looking at range. If the range of the two candles that make up the pattern are significantly larger than the surrounding bars, then they get more significant, since they contain more market movement.

On the other hand, the bearish engulfing pattern is the opposite of the bullish engulfing pattern. The bearish engulfing pattern can signal the possible start of a new downtrend. While these engulfing patterns do occur in the opposite direction, they are still governed by the same underlying principles. The bullish engulfing pattern is a combination of one bearish candlestick followed by a bullish candlestick that engulfs the entire body and wicks of the first candle. This shows that, generally, the broader market is moving in a positive direction. A bearish engulfing pattern consists of two candles, the first of which should be bullish, and the second should be bearish.

Traders may navigate the complex world of trading with greater confidence and make more educated decisions to reach their financial objectives with expert advice. Traders can take opportunities and perhaps improve their trading outcomes by learning how to detect this pattern and analyse consequences. Traders can take opportunities and perhaps improve their trading outcomes by learning how to detect this pattern and analyse concequences. The earlier the pattern is identified, the greater the profit potential. Both springs and upthrusts indicate that the breakout might not be sustained, and a reversal into the opposite direction could be imminent. Because this website is all about backtesting and making 100% quantifiable settings and trading rules, we’ll proceed to backtest a few trading strategies in S&P 500.

To successfully trade Forex using engulfing, you can use candlestick analysis with various technical indicators. It should be emphasized that engulfing gives more accurate signals on higher timeframes from H4 and higher. On lower timeframes, the pattern can give false signals, leading traders into a trap. By the end of the period, it closes below the opening price of the previous candle.

Then there is a bearish trend to turn around, which isn’t the case if the market is making new highs as the pattern is formed. Traders may aim for a target that’s equal to the size of the bullish engulfing candle or even larger, depending on their risk tolerance and market volatility. Sometimes, the bullish engulfing pattern may take time to confirm its validity, leading to delayed entry or missed opportunities. Traders who rely solely on the pattern might enter trades too late or miss out on potential profitable positions. This is a candle where the closing price is lower than the opening price.