The engulfing reversal candlestick pattern provides a signal of a change in the direction of the market trend. However, this model often confuses beginners due to its ambiguous nature. To better understand the what is Engulfing candlestick pattern and its variations, read the article below with Forex Trading to gather more useful information.
Candlestick Patterns What is Engulfing?
The Engulfing candlestick pattern is one of the popular reversal patterns in technical analysis. It occurs when a large candle (candle body) “swallows” the previous candle. That is, the body of the new candle completely covers the body of the previous candle.
Candles What is Engulfing? What types are included?
The engulfing candlestick pattern is a type of candlestick pattern used to predict a change in the direction of the current trend. This pattern consists of two candles, in which the following candle completely obscures the body of the previous candle. The up or down trend will depend on its position in the market. In addition, it can also be combined with double bottom pattern Forex to enhance the accuracy of prediction.
There are two types of engulfing candlestick patterns: Bullish Engulfing and Bearish Engulfing.
- Bullish Engulfing: The Bullish Engulfing candlestick pattern is a reversal pattern in a downtrend. This is a strong signal that buying pressure is increasing. This pattern appears when a large blue candle completely covers the previous smaller red candle in a downtrend. Appearing at the bottom of a downtrend, Bullish Engulfing represents a transition from selling pressure to buying pressure. At the same time, it can forecast a new uptrend.
- Bearish Engulfing: The Bearish Engulfing candlestick pattern is a reversal pattern in an uptrend. This is a strong signal that selling pressure is increasing. This pattern appears when a large red candle completely covers the previous smaller green candle in an uptrend. Appearing at the top of an uptrend, Bearish Engulfing represents a transition from buying pressure to selling pressure. This could forecast a new downtrend.
See more: Read candlestick charts: Basic & advanced material
Identifying characteristics of 2 types of Engulfing candles
So what are the identifying characteristics of the two types of engulfing candles? Here are some highlights of each type of Engulfing candle:
Bullish engulfing candle characteristics
To identify the bullish engulfing candlestick pattern accurately and avoid confusion. Traders need to note the following characteristics:
The bullish engulfing candlestick pattern consists of two opposite candles:
- The first candle is a bearish candle (red) with a short and small body.
- The second candle is a bullish candle (blue) with a long body, completely covering the previous candle.
- The opening price and bottom of a bullish candle are usually lower than the closing price of a bearish candle. At the same time, the closing price and top of the bullish candle need to be higher than the opening price of the bearish candle.
- The bullish engulfing candlestick pattern often appears at the end of a downtrend sequence. Or maybe after a sharp decline.
- If the first candle of the Bullish Engulfing pattern is a Doji candle. The reliability of this pattern will usually be higher.
Identifying characteristics of bearish Engulfing engulfing candle
To identify the bearish engulfing candlestick pattern correctly, traders often pay attention to the following characteristics:
- The opening price of the red candle needs to be higher than the closing price of the first candle (green candle). At the same time, the closing price of the second candlestick needs to be lower than the opening price of the previous green candlestick. Another important thing is that the length of the green candle must completely “engulf” the red candle ahead.
- The trading volume of the second candle (red candle) is usually very large. It signifies the strong participation of investors in the model formation process.
- The bearish engulfing candlestick pattern often appears at the top of an extended uptrend or after a sharp increase. It can also form at resistance zones. Where selling pressure increases and can cause a trend reversal.
Trading method with 2 types of Engulfing candles
After learning the characteristics of the two types of candles what is Engulfing, the next thing traders need to know in trading is the effective trading strategy with these two types of candles. Here is how to trade based on 2 types of engulfing candles:
How to trade forex with Bullish Engulfing candles
After clearly understanding the concept and characteristics of the bullish engulfing candlestick pattern, the trading strategy with this pattern becomes an indispensable part for any price action investor.
The simplest trading method is to observe and apply the following:
- Entry point: Place a BUY order at the opening price of the third candle.
- Stop loss: Place stop loss below the lowest price of the pattern about 1-2 pips.
- Take profit point: Take profit at the trend’s resistance level.
Combining with other indicators is also a smart strategy, for example:
- Combining the bullish engulfing candle with the MA30: A popular approach is to use the MA30 to identify the trend. When the bullish engulfing candlestick pattern appears and is above the MA30 line in an uptrend. At this point, buying can be done at the opening price of the third candle.
- Combining the Bullish Engulfing candlestick with the support line: In this case, a bullish engulfing candlestick pattern is formed at the support area. Buying can be done at the opening price of the third candle. This combination creates a strong and reliable reversal signal. At the same time, there is a support line that increases the probability of success.
See more: Exness – Trade With The World’s Leading Broker Exness
How to trade forex with Bearish Engulfing candles
When trading with the bearish engulfing candlestick pattern, understanding the Bearish candlestick trading strategy What is Engulfing plays an important role. Here are the methods and points to note:
Basic trading method: Before entering the market, make sure the candlestick pattern has been confirmed. Don’t apply the pattern in sideways or choppy markets. Usually, trading after a series of price increases is the best choice. Practice techniques on a demo account before real trading.
Entry point
- Standard entry point: Sell at the closing price of the second candle.
- The next standard entry point is to sell at the breakout point of the pattern. Located a few pips below the bottom of the second candle.
Special attention
- Check if the previous green candle has a longer shadow above it. If so, be careful.
- If the red candle has a long lower shadow, consider placing a sell order at a price equal to half the body of the second candle.
Take profits and cut losses
- Stop loss: Place stop loss above the top of the pattern, around 5-20 pips.
- Take profit: The best risk-to-profit ratio is 1:1 or a maximum of 1:2.
Combined with other forex trading methods:
- Use MA30 or other indicators to determine the trend.
- Combine the model with a resistance zone or MACD line to increase accuracy.
Effective trading strategy with candlesticks What is Engulfing?
- Using the reversal engulfing candle strategy: The bearish engulfing candle pattern can be applied by waiting for a confirmation signal from the next price action. Alternatively, users can wait for a price drop before starting to trade.
- Using Engulfing candles to Trade with the Trend: The pattern does not necessarily appear at the end of the trend. In a strong trend, the Engulfing candlestick pattern can be used to identify new buy points. In addition, traders should learn more about the model what is Morningstar so they can combine it together to increase the accuracy of trading signals.
Conclude
Above is all the information about engulfing candles What is Engulfing as well as other related issues. Forex Trading hopes that this will be useful knowledge, helping readers gain a comprehensive and detailed understanding of this topic.
Frequently asked questions
Common types of candles What is Engulfing?
There are two main types: Bullish Engulfing and Bearish Engulfing. Bullish Engulfing bullish engulfing will often appear in a downtrend. It could mark a reversal to an uptrend. Bearish Engulfing engulfing the bearish will often appear in an uptrend. This could signal a reversal to the downtrend.
What is Candlestick what is Engulfing and how can it be used in trading decision making?
Engulfing candles are often used to determine entry or exit points into the market. For example, a Bullish Engulfing can be a buy signal when it appears after a series of bearish candles. Conversely, a Bearish Engulfing can be a sell signal when it appears after a series of bullish candles.
Is it necessary to combine Engulfing Candles with other tools?
Yes, combine Engulfing candles with other tools. For example, technical indicators (e.g. RSI, MACD) or support/resistance levels can increase the accuracy of trading signals.
