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Engulfing Pattern(Bearish/Bullish):

TRADING WITH ENGULFING CANDLESTICKS: MAIN TALKING POINTS

Engulfing patterns in the forex market provide a useful way for traders to enter the market in
anticipation of a possible reversal in the trend. This article explains what the engulfing candle
pattern is, the trading environment that gives rise to the pattern, and how to trade engulfing
candlesticks in forex.
Keep reading for information on:
 What is an engulfing candlestick and how do they signal a reversal of current trends in the
market?
 There are two engulfing patterns to look out for: bullish engulfing and bearish engulfing
patterns.
 Engulfing candle trading strategies
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WHAT IS AN ENGULFING CANDLESTICK?
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. The image below presents the bullish engulfing candle.

TYPES OF FOREX ENGULFING PATTERNS

There are two engulfing candle patterns: bullish engulfing pattern and the bearish engulfing
candle.
1) Bullish engulfing pattern
The bullish engulfing candle provides the strongest signal when appearing at the bottom of a
downtrend and indicates a surge in buying pressure. The bullish engulfing pattern often
triggers a reversal of an existing trend as more buyers enter the market and drive prices up
further. The pattern involves two candles with the second candle completely engulfing the
‘body’ of the previous red candle.
Interpretation: Price action must show a clear downtrend when the bullish pattern appears.
The large bullish candle shows that buyers are piling into the market aggressively and this
provides the initial bias for further upward momentum. Traders will then look for confirmation
that the trend is indeed turning around by making use of indicators, key levels of support and
resistance and subsequent price action after the engulfing pattern.
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2) Bearish engulfing pattern
The bearish engulfing pattern is simply the opposite of the bullish pattern. It provides the
strongest signal when appearing at the top of an uptrend and indicates a surge in selling
pressure. The bearish engulfing candle often triggers a reversal of an existing trend as
more sellers enter the market and drive prices down further. The pattern involves two candles
with the second candle completely engulfing the ‘body’ of the previous green candle.
Interpretation: Price action must show a clear uptrend when the bearish pattern appears. The
large bearish candle shows that sellers are piling into the market aggressively and this provides
the initial bias for further downward momentum. Traders will then look for confirmation that
the trend is indeed turning around by making use of indicators, levels of support and
resistance, and subsequent price action that occurs after the engulfing pattern.

WHY ARE ENGULFING CANDLES IMPORTANT FOR TRADERS?

Engulfing candles assist traders to spot reversals, indicate a strengthening trend, and assist
traders with an exit signal:
1. Reversals: Spotting reversals are self-explanatory – it allows the trader to enter a trade at
the best possible level and ride the trend to completion.
2. Trend continuation: Traders can look to the engulfing pattern to support the continuation
of the existing trend, for example, spotting a bullish engulfing pattern during an uptrend
provides more conviction that the trend will continue.
3. Exit strategy: The pattern can also be used as a signal to exit an existing trade if the trader
holds a position in the existing trend which is coming to an end.
A limitation of the engulfing candle can arise when the pattern turns out to be more of a
retracement than a definite change in direction, but traders can look for subsequent price
action to reduce the likelihood of this undesirable outcome.
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ENGULFING CANDLE TRADING STRATEGIES
Using the Engulfing Candle Reversal Strategy
Traders can look to trade the bearish engulfing pattern by waiting for confirmation of the move
by observing subsequent price action or to wait for a pullback before initiating a trade.
See below for guidance on how to trade the engulfing candlestick pattern observed on
the GBP/USD four-hour chart.

1. Entry: Look for a successful close below the low of the bearish engulfing candle.
Alternatively, traders can look for a momentary retracement (towards the dotted line)
before entering a short trade.
2. Stop: Stops can be placed above the swing high where the bearish engulfing pattern
occurs.
3. Target / take profit level: The target can set at a previous level of support while ensuring
a positive risk to reward ratio. The risk to reward ratio is depicted by the green and red
rectangles.
Using the Engulfing Candle When Trend Trading
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.
For example, the below chart shows a strong uptrend in the S&P 500 with the appearance of
multiple engulfing patterns (in the direction of the trend) adding more conviction
to long trades. Traders can enter a long trade after observing a close above the bullish candle.
Furthermore, this example includes the presence of a bearish engulfing pattern (red rectangle)
that appeared at the top of the trend, signaling a potential reversal. However, subsequent
price action did not validate this move as successive candles failed to close below the low of
the bearish engulfing candle and the market continued higher – thus underscoring the
importance of validating the pattern
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LEARN MORE ABOUT TRADING WITH CANDLESTICKS

 Develop your candlestick knowledge by learning How to Read a Candlestick Chart
 The engulfing candlestick is just one of many different candlesticks. Learn more about
the Top 10 Candlestick Patterns to Trade the Markets.
 Forex candlesticks provide a range of information about currency price movements. Read
our Complete Guide for Forex Traders.

The Engulfing Pattern:

In a single candlestick pattern, the trader needed just one candlestick to identify a trading
opportunity. However when analyzing multiple candlestick patterns, the trader needs 2 or
sometimes 3 candlesticks to identify a trading opportunity. This means the trading opportunity
evolves over a minimum of 2 trading sessions.
The engulfing pattern is the first multiple candlestick pattern that we need to look into. The
engulfing pattern needs 2 trading sessions to evolve. In a typical engulfing pattern, you will find
a small candle on day 1 and a relatively long candle on day 2 which appears as if it engulfs the
candle on day 1. If the engulfing pattern appears at the bottom of the trend, it is called the
“Bullish Engulfing” pattern. If the engulfing pattern appears at the top end of the trend, it is
called the “Bearish Engulfing” pattern.

The Bullish Engulfing Pattern

The bullish engulfing pattern is a two candlestick pattern which appears at the bottom of the
down trend. As the name suggests, this is a bullish pattern which prompts the trader to go
long. The two day bullish engulfing pattern is encircled in the chart below. The prerequisites for
the pattern are as follows:
1. The prior trend should be a downtrend
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2. The first day of the pattern (P1) should be a red candle reconfirming the bearishness in
the market
3. The candle on the 2nd day of pattern (P2) should be a blue candle, long enough to engulf
the red candle

The thought process behind the bullish engulfing pattern is as follows:

1. The market is in down trend with prices steadily moving down
2. On the first day of the pattern (P1), the market opens low and makes a new low. This
forms a red candle in the process
3. On the second day of the pattern (P2), the stock opens near the closing prices of P1, and
attempts to make a new low. However, at this low point of the day there is a sudden
buying interest, which drives the prices to close higher than the previous day’s open. This
price action forms a blue candle
4. The price action on P2 also suggests that bulls made a very sudden and strong attempt to
break the bearish trend and they did so quite successfully. This is evident by the long blue
candle on P2
5. The bears would not have expected the bull’s sudden action on P2 and hence the bull’s
action kind of rattles the bears causing them some amount of nervousness
6. The bullishness is expected to continue over the next few successive trading sessions,
driving the prices higher and hence the trader should look for buying opportunities
The trade set up for the bullish engulfing pattern is as follows:
1. The bullish engulfing pattern evolves over two days
2. The suggested buy price is around the close price of blue candle i.e on P2
o Risk taker initiates the trade on P2 itself after ensuring P2 is engulfing P1
o The risk averse initiates the trade on the next day i.e the day after P2 around the
closing price, after confirming the day is forming a blue candle
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o If the day after P2 is a red candle day, the risk averse trader will ignore the trade,
owing to rule 1 of candlesticks (Buy strength and Sell weakness)
o On a personal note, in multiple candlestick patterns where the trade evolves over 2
or more days it is worth to be a risk taker as opposed to a risk averse trader
3. The stop loss for the trade would be at the lowest low between P1, and P2
Needless to say, once the trade has been initiated you will have to wait until the target has been
hit or the stoploss has been breached. Of course, one can always trail the stop loss to lock in
profits.
Have a look at DLF’s chart below; the bullish engulfing pattern is encircled.

The OHLC on P1 – Open = 163, High = 168, Low = 158.5, Close = 160. On P2 the OHLC details are
– Open = 159.5, High = 170.2, Low = 159, Close = 169.
The trade set up for the bullish engulfing pattern is as follows:
1. The risk taker would go long on P2 at 169. He can do this by validating P2 as an engulfing
pattern. To validate P2 as an engulfing patterns there are 2 conditions:
o One, the current market price at 3:20PM on P2 should be higher than P1’s open.
o Second, the open on P2 should be equal to or lower than P1’s close
2. The risk averse will initiate the trade, the day after P2 only after ensuring that the day is a
blue candle day. So if the P1 falls on a Monday, the risk averse would be initiating the
trade on Wednesday, around 3:20 PM. However, as I had mentioned earlier, while trading
based on multiple candlestick pattern, it may be worth initiating the trade on pattern
completion day itself i.e P2
3. The stop loss on this trade will be the lowest low between P1 and P2. In this example,
lowest low falls on P1 at 158.5
In this example, both the risk averse and the risk taker would have been profitable.
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Here is an example of a perfect bullish engulfing pattern formed on Cipla Ltd, the risk averse
trader would have completely missed out a great trading opportunity.

There is often a lot of confusion on whether the candle should engulf just the real body or the
whole candle, including the lower and upper shadows. In my personal experience, as long as
the real bodies are engulfed, I would be happy to classify the candle as a bullish engulfing
pattern. Of course, candlestick sticklers would object to this but what really matters is how well
you hone your skills in trading with a particular candlestick pattern.
So going by that thought, I’d be happy to classify the following pattern as a bullish engulfing
pattern, even though the shadows are not engulfed.

The bearish engulfing pattern

The bearish engulfing pattern is a two candlestick pattern which appears at the top end of the
trend, thus making it a bearish pattern. The thought process remains very similar to the bullish
engulfing pattern, except one has to think about it from a shorting perspective.
Take a look at the chart below, the two candles that make up the bearish engulfing pattern is
encircled. You will notice:
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1. To begin with the bulls are in absolute control pushing the prices higher
2. On P1, as expected the market moves up and makes a new high, reconfirming a bullish
trend in the market
3. On P2, as expected the market opens higher and attempts to make a new high. However
at this high point selling pressure starts. This selling comes unexpected and hence tends to
displace the bulls
4. The sellers push the prices lower, so much so that the stock closes below the previous
day’s (P1) open. This creates nervousness amongst the bulls
5. The strong sell on P2 indicates that the bears may have successfully broken down the
bull’s stronghold and the market may continue to witness selling pressure over the next
few days
6. The idea is to short the index or the stock in order to capitalize on the expected
downward slide in prices
The trade set up would be as follows:
1. The bearish engulfing pattern suggests a short trade
2. The risk taker initiates the trade on the same day after validating two conditions
o The open on P2 is higher than P1’s close
o The current market price at 3:20 PM on P2 is lower than P1’s open price. If the two
conditions are satisfied, then it would be logical to conclude that it is a bearish
engulfing pattern
3. The risk averse will initiate the trade on the day after P2 only after ensuring that the day is
a red candle day
4. Since the bearish engulfing pattern is a 2 day pattern, it makes sense to be a risk taker.
However this purely depends on the individual’s risk appetite
Take a look at the chart below of Ambuja Cements. There are two bearish engulfing patterns
formed. The first pattern on the chart (encircled, starting from left) did not work in favor of a
risk taker. However the risk averse would have completely avoided taking the trade. The
second bearish engulfing pattern would have been profitable for both the risk taker and the
risk averse.
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The OHLC data for the bearing engulfing pattern (encircled at the top end of the chart) is as
below:
P1: Open – 214, High – 220, Low – 213.3, Close – 218.75
P2: Open – 220, High – 221, Low – 207.3, Close – 209.4
The trade setup for the short trade, based on the bearish engulfing pattern is as follows:
1. On P2 by 3:20 PM the risk taker would initiate the short trade at 209 after ensuring P1,
and P2 together form a bearish engulfing pattern
2. The risk averse will initiate the trade, the day after P2 only after ensuring that the day is a
red candle day
3. The stoploss in both the cases will the highest high of P1 and P2, which in this case is at
221.
Both the risk averse and the risk taker would have been profitable in this particular case.
The presence of a doji
Now here is a very interesting chart. From my own personal experience I can tell you, charts like
the one shown below are highly profitable. One should not miss such trading opportunities
Take a look at the chart, what are the things that catch your attention?
1. An obvious uptrend as highlighted
2. A bearish engulfing pattern right at the top end of the upward rally
3. A doji formation on the day following P2
What implication would a doji have in this chart?
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Let us inspect this chart event by event:
1. A prolonged uptrend in the chart confirms the bulls are in absolute control
2. On P1 a blue candle is formed, reconfirming the bull’s dominance in the markets
3. On P2 markets open higher and make a new high comforting the bulls. However at the
high point a strong surge to sell builds up, to an extent that the prices closes below P1’s
opening prices
4. This trading action on P2 sets in a bit of panic to bulls, but they are not shaken yet
5. On day 3, let us call it as P3, though the opening is weak it is not much lower compared to
P2’s close. This is not too comforting for the bulls, as they expect the markets to be
stronger.
6. During P3 the market attempts to move higher (Doji’s upper shadow) however the high is
not sustained. Even the low is not sustained and eventually the day closes flat forming a
Doji. As you may recall, Dojis indicate indecision in the market
7. On P2 bulls panicked and on P3 bulls were uncertain
8. Panic with uncertainty is the perfect recipe for a catastrophe. Which explains the long red
candle following the Doji
From my own personal trading experience I can tell you that whenever a doji follows a
recognizable candlestick pattern, the opportunity created is bigger. Besides illustrating this
point, I also want to draw your attention to chart analysis methodology. Notice in this
particular chart, we did not just look at what was happening on P1 or P2 but we went beyond
that and actually combined two different patterns to develop a comprehensive view on the
market.
The Piercing Pattern
The piercing pattern is very similar to the bullish engulfing pattern with a very minor variation.
In a bullish engulfing pattern the P2’s blue candle engulfs P1’s red candle completely. However
in a piercing pattern P2’s blue candle partially engulfs P1’s red candle, however the engulfing
should be between 50% and less than 100%. You can validate this visually or calculate the
same. For example if P1’s range (Open – Close) is 12 , P2’s range should be at least 6 or higher
but below 12.

As long as this condition is satisfied, everything else is similar to the bullish engulfing including
the trade set up. Here a risk taker would initiate the trade on P2 around the close. The risk
averse would initiate the trade, the day after P2 only after ensuring a blue candle is formed.
The stoploss would be the low of the pattern.
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Have a look at the following chart:

Here P2’s blue candle engulfs just under 50% of P1’s red candle. For this reason we do not
consider this as a piercing pattern.

The Dark Cloud Cover

The dark cloud cover is very similar to the bearish engulfing pattern with a minor variation. In a
bearish engulfing pattern the red candle on P2 engulfs P1’s blue candle completely. However in
a dark cloud cover, the red candle on P2 engulfs about 50 to 100% of P1’s blue candle. The
trade set up is exactly the same as the bearish engulfing pattern. Think about the dark cloud
cover as the inverse of a piercing pattern.
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A perspective on selecting a trade
Typically stocks in the same sector have similar price movement. For example, think about TCS
and Infosys or ICICI Bank and HDFC bank. Their price movement is similar because these
companies are more or less of the same size, have similar business, and the same external
factors that affect their business. However this does not mean their stock price movement
would match point to point. For example if there is negative news in the banking sector,
banking stocks are bound to fall. In such a scenario if the stock price of ICICI Bank falls by 2%, it
is not really necessary that HDFC Bank’s stock price should also fall exactly 2%. Probably HDFC
Bank stock price may fall by 1.5% or 2.5%. Hence the two stocks may form 2 different (but
somewhat similar) candlestick patterns such as a bearish engulfing and dark cloud cover at the
same time.
Both these are recognisable candlestick patterns but if I were to choose between the two
patterns to set up a trade. I would put my money on the bearish engulfing pattern as opposed
to a dark cloud cover. This is because the bearishness in a bearish engulfing pattern is more
pronounced (due to the fact that it engulfs the previous day’s entire candle). On the same lines
I would choose a bullish engulfing pattern over a piercing pattern.
However there is an exception to this selection criterion. Later in this module I will introduce a 6
point trading checklist. A trade should satisfy at least 3 to 4 points on this checklist for it to be
considered as a qualified trade. Keeping this point in perspective, assume there is a situation
where the ICICI Bank stock forms a piercing pattern and the HDFC Bank stock forms a bullish
engulfing pattern. Naturally one would be tempted to trade the bullish engulfing pattern,
however if the HDFC Bank stock satisfies 3 checklist points, and ICICI Bank stock satisfies 4
checklist points, I would go ahead with the ICICI Bank stock even though it forms a less
convincing candlestick pattern.
On the other hand, if both the stocks satisfy 4 checklist points I will go ahead with the HDFC
Bank trade.
Key takeaways from this chapter
1. Multiple candlestick patterns evolve over two or more trading days
2. The bullish engulfing pattern evolves over two trading days. It appears at the bottom end
of downtrend. Day one is called P1 and day 2 is called P2
3. In a bullish engulfing pattern, P1 is a red candle, and P2 is a blue candle. P2’s blue candle
completely engulfs P1;s red candle
4. A risk taker initiates a long trade at the close of P2 after ensuring P1 and P2 together form
a bullish engulfing pattern. A risk averse trader will initiate the trade the day after P2, near
the close of the day
5. The stoploss for the bullish engulfing pattern is the lowest low between P1 and P2
6. The bearish engulfing pattern appears at the top end of an uptrend. P1’s blue candle is
completely engulfed by P2’s red candle
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7. A risk taker initiates a short trade at the close of P2 after ensuring P1 and P2 together
form a bearish engulfing pattern. The risk averse trader will initiate the trade the day after
P2, after confirming the day forms a red candle
8. The highest high of P1 and P2 forms the stoploss for a bearish engulfing pattern
9. The presence of a doji after an engulfing pattern tends to catalyze the pattern’s evolution.
10. The piercing pattern works very similar to bullish engulfing pattern, except that P2’s
blue candle engulfs at least 50% and below 100% of P1’s red candle
11. The dark cloud cover works similar to the bearish engulfing pattern, except that P2’s
red candle engulfs at least 50% and below 100% of P1’s blue candle.

The engulfing pattern is a strong reversal signal that can be bullish or bearish and is composed
of two candlesticks – the body of the second candlestick must engulf the body of the preceding
body.

Is the Bullish Engulfing Candlestick a Reliable Pattern?

A bullish reversal usually starts with a quick burst of momentum. These events can
be understood by looking at candlestick patterns. One of these patterns is the bullish engulfing
candle.
These can be useful buy signals. But in order to trade them we have to be able to recognize the
reliable patterns from the many false ones.
Definition of a Bullish Engulfing Candle
A bullish engulfing pattern appears when a long white candle follows a shorter black candle. The
white should completely engulf the bearish (black) candlestick from top to bottom. This means
the top of the white candle should be above the top of the black one and the bottom of the
white candle should be at or below the bottom of the black candle.
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Price Gaps
The bottoms of the candles might be the same if there was no gap between close and open. But
if the bottom of the white candle is below the black this means there was a price gap between
the close of the black and the opening of the white candle.
That could happen if the market was moving very fast. This could suggest a capitulation as
buyers are panicking to close their position.
A gap can also happen, and is likely, if the market closes between the open and the close of the
two candles. This would happen over a weekend.
What Does a Bullish Engulfing Mean?
The engulfing pattern means that bulls used the market low as a buying opportunity. A large
white candle suggests this was a sudden and decisive shift to bullish sentiment.
It is one sign that market sentiment may have turned bullish. Or at least has during the interval
of the candle.
We have to keep in mind though that one candle is just a brief snapshot of the market. Like the
other candle patterns, we need to use discretion when using it as a signal to trade on.
When is the Bullish Engulfing Pattern a Reliable Buy Signal?
It’s not enough to trade on a single candlestick just because it happens to be an engulfing
pattern. Back testing on various markets shows this simple kind of strategy doesn’t work.
To create a reliable trading rule we need to look for other indications that sentiment is turning
bullish. An engulfing pattern is just one part of the analysis.
Before accepting the engulfing candle as a potential buy signal a trader will look at the
following:
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 Position of candle within the trend: Where is the pattern within the down trend? Does
the candle form a deep low? A bullish reversal is more likely if the bearish trend is already
oversold. Bullish engulfs are also common once an uptrend gets underway.
 Size of the engulfing candle: Is the engulfing candle much longer than the average length
of the trailing candles? If it is it suggests that sentiment turned bullish quickly and
decisively.
 Support lines: Did the engulfing candlestick rebound from a key support such as a long
term trend line or horizontal low? If the lower shadow pierced the support line but
rebounded there could be further strong upward momentum because it suggests there
was a capitulation.
Checking the above points can help you filter out the weaker cases that may be giving a false
signal. To help with the above analysis we use a trendline tool and an engulfing candle
indicator.

As an example, take a look at the chart above. It shows the EUR/USD daily chart (D1). The red
box outlines a strong bullish engulfing candle.
Markers
1. It’s a strong engulfing candlestick in terms of its size. There’s was a quick flip from bearish
to bullish sentiment.
2. The engulfing candle marks a deep low within the trend.
3. It pierces a long term trend support line, yet the market rebounds strongly.
In the example, the market is oversold. When sentiment turns bullish, those who are short the
market will need to buy back their positions at the earliest. So this suggest some further
upwards momentum could be in store.
Waiting for Further Confirmation
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With bullish engulfing candles it’s normal to see some pullback right after the pattern forms. If
you look at the chart above, the next two candles are bearish. And the market gives back some
of the gains.
If you wait for two or three bars to complete, this will help you to assess which side the strength
is on. A short pullback can create a better buy opportunity. If the next couple of candles give up
more than half of engulfing candle then it’s probably wise to wait.
In the EUR/USD example above the price has to overcome a strong resistance line. A day trader
would probably use that as a profit target. A trader with a longer term outlook would probably
wait for that resistance line to break through as it does in the next upswing.
Bearish Engulfing Candlestick: When is it a Strong Reversal Pattern?
When looking for a reversal in a forex pair there are a few pointers that we can scan the chart
for. One of these is the bearish engulfing candlestick. This pattern can appear anywhere in a
chart. But many traders use it as a bearish marker because it’s often seen at trend peaks or
near places where the trend corrects downwards briefly.
Definition of the Bearish Engulfing Candle
A bearish engulfing candlestick is where a white candle is followed by a long black candle. The
long black candle or bearish candle should engulf the white candle. This means its top is at or
above the top of the white candle and the bottom is at or below the bottom of the white
candle.

This means the opening level of the black candle should be at or above the close of the white
candle. If the black one opens above it, that means there was a gap between the close/open
prices. Price gaps often happen over weekends or when the price is moving quickly.
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This candle pattern highlights points in time where market sentiment flipped from bullish to
bearish.
Are Bearish Engulfing Candlesticks Reliable?
If you’re using engulfing candles as your main signal, I suggest reading my other article first. It
looks at the reliability of this pattern based on real chart data.
In summary, what it shows is that if you’d blindly traded the bearish engulfing candle in forex
over the past decade, you’d probably have done slightly worse than if you’d traded on a coin
flip.
Nevertheless this isn’t to say that engulfing candles aren’t of any use. When using them, as with
most charting techniques, we need to add some human judgement. Then and only then make
a decision on which events to trade, which to ignore and which to counter-trade.
Looking at the Entire Chart
Unlike a MACD signal or moving average line, one candlestick will only give you a snapshot of
market sentiment at one single time instant.
Candlesticks, by their nature are “noisy”. Single candlesticks, especially at lower timeframes can
often be false signals. They are more a feature of supply and demand at a given point in time.
We therefore should use the bearish engulfing pattern together with other indications to get a
broader idea of what is going on in the market at that particular instant. We also have to be
ready to use it as a contrarian signal.
Salient factors to look for
When trading the bearish engulfing pattern there are certain salient pointers that we can use to
help understand what the market is doing. These include:
 Strength of engulfing candle
 Overall position within trend
 Other relevant technical patterns
 Look for contrarian (negative) markers
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Take the chart in Figure 2 as an example. This shows a strong bearish engulfing candlestick in
the red box. Three features make this more salient than others:
1. It’s a strong pattern in terms of its size. This means the market sentiment flipped to
bearish quickly and decisively at that point.
2. The candle completes a bearish rising wedge shown by the green lines. The candle breaks
cleanly through all three support lines of the wedge. This raises the odds of some further
downward movement.
3. Finally, a negative marker is that it broke up through the simple moving average line
(SMA-200). At this point the crowd would have been anticipating an upward break and a
reversal of the bearish trend. This turned out to be a failed breakout. Therefore these
buyers will need to sell soon, probably adding to downward pressure.
These are just a few examples of salient features that can help separate the weaker patterns
from the strong ones that are more likely to lead to profitable trades.
If you use Metatrader you can use a trendline indicator combined with the engulfing candle
detector to help with the analysis. Both are free to use.
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The Engulfing Pattern

The engulfing pattern is the inverse of the harami pattern with the exception that the
candlesticks that make up the pattern cannot be the same color. It is similar to the outside
reversal pattern. Like the harami pattern, the engulfing pattern consists of two candlesticks
with the first candlestick being a relatively short candlestick with a short real body and the
second being a large candlestick with a big real body that engulfs the real body of the first
candlestick. The engulfing pattern can be either bearish or bullish, depending on its location on
the price chart. In addition, the colors of the candlesticks are significant.
Firstly, the engulfing pattern is a trend reversal pattern and must therefore appear in an existing
trend. The pattern is more reliable if it appears at or near a support or resistance line, or
a trendline. Secondly, the colors of the candlesticks are important. In an uptrend, the first
candlestick in the pattern must be light indicating that it closed higher than its open price. The
second, larger candlestick must then be dark, indicating that its close was lower than its
opening price. The small real body of the first candlestick indicates a degree of indecision and
uncertainty about the uptrend. Then large body of the second candlestick indicates that supply
has exceeded demand and that the onset of a down trend is very possible. Conversely, in a
down trend, the first candlestick in the pattern must be dark in color indicating that it closed
lower than its open price. The second, larger candlestick must then be light, indicating that it
closed higher than its opening price. The small real body of the first candlestick indicates a
degree of indecision and uncertainty in the down trend and the large body of the second
candlestick indicates that demand has exceeded supply and that the onset of an uptrend is
very possible. Thirdly, the length of the first candlestick's real body is significant as a smaller
real body implies greater indecision and uncertainty. Fourthly, volumes on the second
candlestick should be higher than on the first.
Bearish Engulfing Pattern Definition and Tactics:
What is a Bearish Engulfing Pattern?
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. The pattern can be important
because it shows sellers have overtaken the buyers and are pushing the price more
aggressively down (down candle) than the buyers were able to push it up (up candle).
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KEY TAKEAWAYS
 A bearish engulfing pattern can occur anywhere, but it is more significant if it occurs after
a price advance. This could be an uptrend or a pullback to the upside with a larger
downtrend.
 Ideally, both candles are of substantial size relative to the price bars around them. Two
very small bars may create an engulfing pattern, but it is far less significant than if both
candles are large.
 The real body—the difference between the open and close price—of the candlesticks is
what matters. The real body of the down candle must engulf the up candle.
 The pattern has far less significance in choppy markets.

What Does the Bearish Engulfing Pattern Tell You?

A bearish engulfing pattern is seen at the end of some upward price moves. It is marked by the
first candle of upward momentum being overtaken, or engulfed, by a larger second candle
indicating a shift toward lower prices. The pattern has greater reliability when the open price
of the engulfing candle is well above the close of the first candle, and when the close of the
engulfing candle is well below the open of the first candle. A much larger down candle shows
more strength than if the down candle is only slightly larger than the up candle.
The pattern is also more reliable when it follows a clean move higher. If the price action
is choppy or ranging, many engulfing patterns will occur but they are unlikely to result in major
price moves since the overall price trend is choppy or ranging.
Before acting on the pattern, traders typically wait for the second candle to close, and then take
action on the following candle. Actions include selling a long position once a bearish engulfing
pattern occurs, or potentially entering a short position.
If entering a new short position, a stop loss can be placed above the high of the two-bar pattern.
Astute traders consider the overall picture when utilizing bearish engulfing patterns. For
example, taking a short trade may not be wise if the uptrend is very strong. Even the formation
of a bearish engulfing pattern may not be enough to halt the advance for long. Yet, if the
overall trend is down, and the price has just seen a pullback to the upside, a bearish engulfing
pattern may provide a good shorting opportunity since the trade aligns with the longer-term
downtrend.
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Example of How to Use a Bearish Engulfing Pattern

The Difference Between a Bearish Engulfing Pattern and a Bullish Engulfing Pattern
These two patterns are opposites. A bullish engulfing pattern occurs after a price move lower
and indicates higher prices to come. The first candle, in the two-candle pattern, is a down
candle. The second candle is a larger up candle, with a real body that fully engulfs the smaller
down candle.
Limitations of Using a Bearish Engulfing Pattern
Engulfing patterns are most useful following a clean upward price move as the pattern clearly
shows the shift in momentum to the downside. If the price action is choppy, even if the price is
rising overall, the significance of the engulfing pattern is diminished since it is a fairly common
signal.
The engulfing or second candle may also be huge. This can leave a trader with a very large stop
loss if they opt to trade the pattern. The potential reward from the trade may not justify the
risk.
Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks
don't provide a price target. Instead, traders will need to use other methods, such as indicators
or trend analysis, for selecting a price target or determining when to get out of a profitable
trade.
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Bullish Engulfing Pattern Definition
What is a Bullish Engulfing Pattern?
The bullish engulfing pattern is a two-candle reversal pattern. The second candle completely
‘engulfs’ the real body of the first one, without regard to the length of the tail shadows. The
Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle
followed by a larger hollow candle. On the second day of the pattern, price opens lower than
the previous low, yet buying pressure pushes the price up to a higher level than the previous
high, culminating in an obvious win for the buyers. It is advisable to enter a long position when
the price moves higher than the high of the second engulfing candle—in other words when the
downtrend reversal is confirmed.
A bullish engulfing pattern can be identified when a small black candlestick, showing a bearish
trend, is followed the next day by a large white candlestick, showing a bullish trend, the body
of which completely overlaps or engulfs the body of the previous day’s candlestick.

KEY TAKEAWAYS
 A bullish engulfing pattern is a candlestick chart 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.
 Bullish engulfing patterns are more likely to signal reversals when they are preceded by
four or more black candlesticks.
 Investors should look not only to the two candlesticks which form the bullish engulfing
pattern but also to the preceding candlesticks.
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What Does a Engulfing Pattern Tell You?
A bullish engulfing pattern is not to be interpreted as simply a white candlestick, representing upward price movement,
following a black candlestick, representing downward price movement. For a bullish engulfing pattern to form, the stock
must open at a lower price on Day 2 than it closed at on Day 1. If the price did not gap down, the body of the white
candlestick would not have a chance to engulf the body of the previous day’s black candlestick.

Because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the white
candlestick in a bullish engulfing pattern represents a day in which bears controlled the price of the stock in the morning
only to have bulls decisively take over by the end of the day.

The white candlestick of a bullish engulfing pattern typically has a small upper wick, if any. That means the stock closed
at or near its highest price, suggesting that the day ended while the price was still surging upward. This lack of an upper
wick makes it more likely that the next day will produce another white candlestick that will close higher than the bullish
engulfing pattern closed, though it’s also possible that the next day will produce a black candlestick after gapping up at
the opening. Because bullish engulfing patterns tend to signify trend reversals, analysts pay particular attention to them.

Example of a Bullish Engulfing Pattern

As a historical example, let's consider Philip Morris (PM) stock. The company's shares were a great long in 2011 and
remained in an uptrend. In 2012, though, the stock was retreating. On January 13, 2012 a bullish engulfing pattern
occurred; the price jumped from an open of $76.22 to close out the day at $77.32.1 This bullish day dwarfed the prior
day's intraday range where the stock finished down marginally. The move showed that the bulls were still alive and
another wave in the uptrend could occur.

Bullish Engulfing Candle Reversals

Investors should look not only to the two candlesticks which form the bullish engulfing pattern
but also to the preceding candlesticks. This larger context will give a clearer picture of whether
the bullish engulfing pattern marks a true trend reversal.
Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or
more black candlesticks. The more preceding black candlesticks the bullish engulfing candle
engulfs, the greater the chance a trend reversal is forming, confirmed by a second white
candlestick closing higher than the bullish engulfing candle.
Acting on a Bullish Engulfing Pattern
Ultimately, traders want to know whether a bullish engulfing pattern represents a change of
sentiment, which means it may be a good time to buy. If volume increases along with price,
aggressive traders may choose to buy near the end of the day of the bullish engulfing candle,
anticipating continuing upward movement the following day. More conservative traders may
wait until the following day, trading potential gains for greater certainty that a trend reversal
has begun.
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The Difference Between a Bullish Engulfing Pattern and a Bearish Engulfing Pattern
These two patterns are opposites of one another. A bearish engulfing pattern occurs after a
price move higher and indicates lower prices to come. Here, the first candle, in the two-candle
pattern, is an up candle. The second candle is a larger down candle, with a real body that fully
engulfs the smaller up candle.
Limitations of Using a Bearish Engulfing Pattern
A bullish engulfing pattern can be a powerful signal, especially when combined with the current
trend, however they are not bullet-proof. Engulfing patterns are most useful following a clean
downward price move as the pattern clearly shows the shift in momentum to the upside. If the
price action is choppy, even if the price is rising overall, the significance of the engulfing
pattern is diminished since it is a fairly common signal.
The engulfing or second candle may also be huge. This can leave a trader with a very large stop
loss if they opt to trade the pattern. The potential reward from the trade may not justify the
risk.
Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks
don't provide a price target. Instead, traders will need to use other methods, such as indicators
or trend analysis, for selecting a price target or determining when to get out of a profitable
trade.
A Tutorial on Mastering the Engulfing Candlestick Pattern:
Candlestick patterns are an essential component of price action analysis. Candlestick
formations can provide high probability signals about a potential outcome on the price chart.
Therefore, Forex traders should be aware of the various candlestick setups that can occur in
the market. Today we will discuss one of these candlestick formations. This candlestick
structure is called the Engulfing candlestick pattern. We will go through the functions of this
chart figure and we will discuss a strategy for combining it with other forms of price action
analysis.
What is the Japanese Engulfing Candlestick Pattern?
The Engulfing candlestick pattern is formed by two candles (two periods). For this reason, it
falls in the category of double candlestick patterns.
The pattern has a pretty easy-to-recognize structure. It consists of a candle, which gets
“engulfed” by the next candle on the chart. To get a valid Engulfing pattern, the first candle
should completely fit inside the body of the next candle. See below, an illustration of an
engulfing formation:
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This is how the Engulfing pattern appears on the chart. Notice that the bearish candle is fully
engulfed by the body of the next candle which is bullish. The opposite scenario is possible too.
The engulfed candle could be bullish and the engulfing candle could be bearish.
Potential of the Engulfing Candlestick Setup
The Engulfing candlestick setup has a strong reversal character. If the price is increasing and an
Engulfing pattern is created on the way up, this gives us a signal that a top might be forming
now.
The opposite is in force too. If the price is decreasing and an Engulfing pattern appears on the
chart, this suggests that the price action might be forming a bottom.
Types of Forex Engulfing Patterns
As you may have probably guessed, the Engulfing trading pattern has two variations depending
on its potential. The first one is the bullish Engulfing pattern, and the other is the bearish
Engulfing pattern. Let’s now go through each of these two Engulfing types:
Bullish Engulfing
The bullish Engulfing pattern could be found during bearish trends. It starts with a bearish
candle on the chart. Then this candle gets fully engulfed by the body of the next candle on the
chart, which is bullish. This pattern creates a bullish potential on the chart and it could reverse
the current bearish trend. Take a look below at the sketch of the bullish Engulfing candle
pattern:

Notice that the first candle of the pattern is bearish and it is fully contained by the body of the
next candle, which is bullish. This creates the bullish Engulfing, which implies the trend
reversal. A valid bullish Engulfing would be the beginning of a bullish move after a recent
decrease.
Bearish Engulfing
The bearish Engulfing pattern has exactly the opposite functions compared to the bullish
Engulfing. The bearish Engulfing formation on the chart could be found during bullish trends.
The pattern starts with a bullish candle. This candle then gets fully contained by the body of
the next candle, which is bearish. This pattern creates a strong potential for a price reversal on
the chart. In this manner, the current bullish trend might turn into a new bearish movement on
the chart. Now have a look below at the sketch of the bearish Engulfing pattern:
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This time the engulfed candle is bullish and the Engulfing candle is bearish. The body of the
second candle fully contains the first candle, which completes the shape of the bearish
Engulfing pattern on the chart. A bearish Engulfing setup could indicate the beginning of a new
bearish move on the chart.
Engulfing Trading Pattern Confirmation
The confirmation of the Engulfing pattern comes with the candle after the pattern. It needs to
break the body level of the engulfing candle to confirm the validity of the pattern.
A valid bullish Engulfing pattern continues with a third candle (bullish), which breaks the body
of the engulfing candle upwards. A valid bearish Engulfing pattern continues with a third
candle (bearish), which breaks the body of the engulfing candle downwards. This is how the
Engulfing confirmation appears on the chart:

See that this time we have added the confirmation candle after the pattern. When you see this
candle behavior after an engulfing pattern, this will confirm its validity.
Engulfing Trading Strategy
We have gone in detail through the structure of the Engulfing formation. Let’s now discuss a
trading strategy related to this chart pattern.
Engulfing Pattern Trade Entry
The opening of your trade comes with the confirmation of the Engulfing pattern. This is the
third candle – the one that comes after the engulfing candle – and it is supposed to break the
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body of the engulfing candle in the direction of the expected move. When a candle closes
beyond this level, we get the confirmation of the pattern and we can open the respective
trade.
If the Engulfing scenario is bearish, the price breakout should be through the lower level of the
engulfing candle’s body. In this manner, we should prepare for a short trade. If the Engulfing
scenario is bullish, the price breakout should come through the upper level of the engulfing
candle’s body. This means that we should react with a bullish trade.
Engulfing Pattern Stop Loss
You should always be in control of the risk you are taking. As such, your Engulfing trades should
always be protected with a stop loss order. The stop will secure your bankroll and you will
typically know the maximum you can lose on the trade. Analyzing your risk and reward before
initiating any trade will help in deciding whether to take the trade or not.
The best place for a stop loss order in an Engulfing trade is beyond the Engulfing pattern
extreme. This would mean that if the Engulfing setup is bullish, the Stop Loss order should be
placed under the lower candlewick of the engulfing candle. If the Engulfing setup is bearish,
then the Stop Loss order should be located above the upper candlewick of the engulfing
candle.

Above you see a sketch which illustrates where you should place your stop loss when trading
bullish and bearish Engulfing patterns. If the pattern fails to move in the desired direction
causing the stop loss to be hit, it will prove the trade assumption wrong and act to protect your
bankroll.
Engulfing Pattern Take Profit
A rule of thumb is that an Engulfing trade should be held for at least the price move equal to
the size of the pattern. This means that the minimum you should pursue from an Engulfing
pattern should equal the distance between the tips of the upper and the lower candlewick of
the engulfing candle.
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When this distance is fulfilled by the price action, you can either close the whole trade, or part
of it. If you decide to keep a portion of the trade open, then you should carefully monitor price
action for a potential exit opportunity. This includes support/resistance breakouts and trend
or channel breakouts. Chart and candle patterns are also very important here. If you spot a
chart/candle pattern which is contrary to your trade, you may want to close your position.
Engulfing Pattern and Price Action Strategy
Now let’s take our understanding of the Engulfing pattern and illustrate a price action based
trading strategy. Have a look at the chart below:

This is the hourly chart of the GBP/USD Forex pair for Jan 1 – Jan 5, 2016. The image depicts a
bearish Engulfing pattern and some rules to trade it.
The chart starts with a price increase which we have marked with the green arrow on the
image. You will notice that the price action creates only bullish candles. Suddenly, we see a
relatively big bearish candle, which fully engulfs the previous candle. This confirms the
presence of a bearish Engulfing pattern on the chart.
However, a confirmation candle needs to appear before we can consider taking a position in
this case. The next candle on the chart is bearish again and closes below the body of the
engulfing candle. This is the confirmation needed to take a trade based on this bearish
Engulfing pattern. The stop loss order for this trade should be located above the upper wick of
the engulfing candle as shown on the image.
The yellow arrows on the chart show the size of the pattern and how it should be applied as a
minimum target on the chart. This target gets completed with the next candle, which appears
after the Engulfing confirmation.
This trade could be extended for further gains. You can use price action rules to attain a final
exit signal on the chart. You will note that the price of the GBP/USD creates another two big
bearish candles on the chart. This would have doubled the gains on the trade. However, the
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next candle on the chart is a Hammer Reversal, also referred to as a Pin Bar. and it has a strong
bullish potential. The trade should be closed out when confirmation of the Hammer pattern
appears on the chart. As you see, the next candlestick is bullish and breaks the upper level of
the Hammer pattern. This confirms the validity of the Hammer Reversal, which creates an exit
signal for the short position. The bearish Engulfing trade should be liquidated at the close of
the bullish candle which appears after the Hammer. This is shown with the second red arrow
on the chart.
This example shows how price action rules could assist in finding the most opportune exit point
on the chart.
Engulfing Patterns at Support and Resistance
Another effective way to trade the Engulfing pattern with price action is by spotting the
pattern at key support and resistance levels.
If the price action approaches a resistance area and at the same time a bearish Engulfing
pattern appears around that zone, this creates a very strong bearish potential on the chart. The
same is in force in the opposite direction. If the price action approaches a support level and at
the same time a bullish Engulfing pattern appears on the chart, this creates a very strong
bullish potential.
These occurrences offer a high probability of success on the trade. Many times, when you spot
this technical confluence and enter at the right moment, you can get in early on an emerging
trend reversal. Let’s now see how combining Engulfing patterns with support and resistance
levels work:

You are looking at the hourly chart of the USD/CHF for Feb 19 – 24, 2016. The image shows
another bearish Engulfing trade, which takes place after price interaction with a psychological
resistance level.
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The black horizontal line on the image is the very strong psychological resistance of the Swissy
at the parity rate of 1.0000 Swiss Franc for 1 Dollar. After a strong price increase, the USD/CHF
meets this resistance level and tests it two more times afterwards. The third time the price
tests the resistance, it creates a relatively big bearish candle, which engulfs the previous bullish
candle. This creates a bearish Engulfing pattern on the chart.
The confirmation of the bearish Engulfing comes with the next candle, which is bearish and
breaks the lower level of the engulfing candle’s body. The closing of the confirmation candle
provides the short entry signal.
A stop loss should be placed above the upper candlewick of the engulfing bar. This is the level
right above 1.0000.
The price starts drop afterwards. A couple of periods later, the minimum target of the pattern
is reached (yellow arrows). You could close a portion of the position here, and keep a portion
open in anticipation of a further decrease in price.
Notice that on the way down the USD/CHF pair continues with lower highs and lower lows,
which provides for confidence in the downtrend. Suddenly, the price action starts a sideways
movement and we mark the upper level of the range with the thin black horizontal line on the
chart. The trade should be closed as soon as the price action breaks this resistance and closes a
candle above. As you see, this creates a higher top on the chart, which implies that the bearish
run might be interrupted.
Combining Support and Resistance with the Engulfing pattern is an excellent price action based
trading method.
Conclusion
 The Engulfing Candlestick pattern is a double candle formation.
 It is a two-candle formation wherein the second candle fully engulfs the previous candle
including the wicks.
 The Engulfing candlestick pattern has a reversal potential on the chart. In this manner, we
recognize two types of Engulfing candle patterns:
o Bearish Engulfing: It could be found at the end of bullish trends. It starts with a
bullish candle and then a bigger bearish candle, whose body fully engulfs the first
candle of the pattern. This creates bearish (reversal) potential on the chart.
o Bullish Engulfing: It could be found at the end of bearish trends. It starts with a
bearish candle and then a bigger bullish candle, whose body fully engulfs the first
candle of the pattern. This creates a bullish (reversal) potential on the chart.
 The confirmation of the Engulfing pattern comes with the next candle on the chart:
o If the Engulfing is bullish, the next candle should be bullish and it should close above
the upper level of the engulfing candle’s body.
o If the Engulfing is bearish, the next candle should be bearish and it should close
below the lower level of the engulfing candle’s body.
 There are the three basic Engulfing trading rules:
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o Open a trade when the price closes at the confirmation candle.
o Place a stop loss order beyond the opposite side of the Engulfing formation.
o Stay in the trade for a minimum price move equal to the size of the Engulfing pattern,
or use price action rules to extend the duration of the trade.
 A high probability price action approach for trading bullish and bearish Engulfing patterns
is to look for the pattern to appear at important support and resistance levels.
How to Trade Bullish and Bearish Engulfing Candlestick Patterns?
Bullish and bearish engulfing candlestick patterns are powerful reversal formations that
generate a signal of a potential reversal. They are popular candlestick patterns because they
are easy to spot and trade.

Structures

A bullish engulfing candlestick pattern occurs at the end of a downtrend. It consists of two
candles, with the first candle having a relatively small body and short shadows, also known as
wicks. The second candle, on the other hand, has longer wicks and a real body that engulfs the
body of the previous candle.

As seen in the illustration above, the second candle completely overwhelms the prior candle.
For a pattern to qualify as bullish engulfing, the high of the second candle should hit higher
prices than the high of the prior candle. The same scenario applies for the low.
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Ideally, the closing price (top of the body) should also be higher than the highest point of the
wick of the prior candle. This scenario gives further significance to the second candle and
shows that the bulls have control over the price action now.

The bearish candlestick pattern follows the same line of thought, the only difference is that it is
a bearish reversal pattern that occurs at the top of an uptrend. The first candle is a bullish
candle that signals the continuation of the uptrend, before the appearance of the powerful
bearish candle that completely shuts down the prior candle.

Moreover, if the second candle is huge and long, it can practically close the door for you to
open a trade, as your stop would be placed far away from the entry price i.e. high risk and not
such high reward.

The best way to learn the strengths and weaknesses of the bullish and bearish engulfing
patterns, as well as other candlestick formations, is to use the MetaTrader 5 trading
platform and pay close attention to when these formations are created and how the price
action behaves.
The importance and limitations of engulfing patterns

The significance of engulfing candles in trading is high. As traders, we aim to capitalize on new
trends when markets change direction. Reversal patterns, such as bullish and bearish engulfing
patterns, signal an impending change in the price direction, as the so far dominant force has
started losing momentum, which allows the other force to capitalize.

Both patterns take place at the end of a strong trend. The idea behind the bullish engulfing
pattern signals that the second candle is powerful enough to initiate a new trend. Since the low
of the second candle is lower than the one of the first candle, it signals that the bulls were able
to push the price action from the session lows to higher prices, which is not seen during the
first prior session.

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.
How to trade the bullish engulfing pattern
In the chart below, we see a AUD/USD daily chart. The price action had been putting in a series
of lower highs and lower lows to ultimately create three swing lows. Following a new short-
term low, the price action suddenly presses higher to create a strong, powerful bullish candle.
Source--Internet

All elements are in place, and the bullish engulfing formation is formed. Investors recognize
this pattern and use this opportunity to capitalize on the imminent change in the trend
direction. The price action then pushes higher to record two swing highs, and ends up in
ultimately trading at higher levels.

In this particular example, we see the power of a bullish engulfing pattern. The trend reversed
after the second candle generated a signal that the bulls have taken control over the price
action, and the downtrend may be finished.

How to trade the bearish engulfing pattern

The second example that we show here is a great opportunity to see the engulfing pattern at
its best. The USD/CAD price is trading lower on a daily chart. At one point, the price rebounds
strongly before it reverses again to continue trading lower, and ultimately printing the new
short-term low.
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