Candlestick Engulfing

Trading Strategy

Morgan Grey
Forex engulfing patterns offer traders a practical technique to join the market in
preparation of a potential trend reversal. The engulfing candle pattern, the trading
environment that gives rise to the pattern, and how to trade engulfing candlesticks in
forex are all explained in this article.

For details, continue reading.

What is an engulfing candlestick, and how can they indicate a change in market
trends?
Bullish engulfing patterns and bearish engulfing patterns are the two engulfing
patterns to watch out for.
Trading techniques engulfing candles

WHAT IS AN ENGULFING CANDLESTICK?

Candles that completely engulf one another frequently represent a market

trend reversal. In this particular pattern, there are two candles, with the second
candle ‘engulfing’ the first candle’s entire body. Depending on where it forms in
reference to the current trend, the engulfing candle can be either bullish or
bearish. Below is a picture of a bullish engulfing candle.
TYPES OF FOREX ENGULFING PATTERNS
The bullish engulfing pattern and the bearish engulfing candle are the two
types of engulfing candle patterns.

1) Bullish engulfing pattern

The bullish engulfing candle, which appears at the bottom of a downtrend and
signals an increase in purchasing pressure, is the strongest indication. As more
buyers enter the market and push prices even higher, the bullish engulfing
pattern frequently causes a trend to reverse. Two candles are used in the
pattern, and the second candle totally engulfs the preceding red candle's
"body."

Interpretation: When the bullish pattern develops, price movement must

exhibit a distinct downturn. The enormous bullish candle indicates that buyers
are actively flooding the market, which establishes the initial bias for continued
upward momentum. Traders will then use indicators, significant levels of
support and resistance, and following price action after the engulfing pattern to
hunt for evidence that the trend is truly reversing.
2) Bearish engulfing pattern

The bullish engulfing pattern has a negative counterpart that is just the
opposite. When it appears near the peak of an upswing, it sends out the
strongest signal and denotes an increase in selling pressure. As more sellers
enter the market and force prices even lower, the bearish engulfing candle
frequently marks the beginning of a trend reversal. Two candles make up the
design, with the second candle entirely swallowing the preceding green candle’s
“body.”

Interpretation: When the bearish pattern occurs, price activity must exhibit a
distinct upswing. The enormous bearish candle indicates that sellers are
aggressively flooding the market, which establishes the first bias for continued
downward momentum. Traders will then employ indicators, levels of support
and resistance, and price action that follows the engulfing pattern to look for
evidence that the trend is truly changing for the better.
WHY ARE ENGULFING CANDLES IMPORTANT FOR TRADERS?

Engulfing candles provide an exit signal, help traders notice trend reversals,
and suggest a trend that is strengthening:

Reversals: Recognizing reversals enables a trader to enter a position at the ideal

price and ride the trend to its conclusion.
Trend continuation: Traders can use the engulfing pattern as evidence that the
current trend will continue. For instance, identifying a bullish engulfing pattern
during an uptrend gives traders additional assurance that the trend will hold.
Leave strategy: If the trader holds a position in the current trend that is ending,
the pattern can also be utilized as a signal to leave a trade that is already open.
When the pattern turns out to be more of a retracement than a clear change in
direction, the engulfing candle pattern can have a restriction, but traders
should watch for following price action to lessen the possibility of this
unfavorable conclusion.

ENGULFING CANDLE TRADING STRATEGIES

Application of the Engulfing Candle Reversal Strategy

The bearish engulfing pattern can be traded by waiting for confirmation of the
move by watching following price movement or by waiting for a pullback before
opening a position.

Advice on trading the engulfing candlestick pattern seen on the GBP/USD four-
hour chart is provided below.
Look for an effective close below the low of the bearish engulfing candle to
signal entry. Alternatively, before making a short trade, traders can watch for a
brief retracement (toward the dotted line).
Stop: Above the swing high, where the bearish engulfing pattern appears, stops
can be set.
Target / take-profit level: As long as there is a favorable risk-to-reward ratio,
the target might be established at a previous level of support. The green and red
rectangles represent the risk to benefit ratio.
When trend trading, use the engulfing candle

It's not necessary for engulfing candles to occur towards the end of a trend.
Traders can gather information from the candle pattern suggesting towards
sustained momentum in the direction of the existing trend when seen within a
strong trend.

For instance, the S&P 500 chart shown below illustrates a robust uptrend, and
the occurrence of numerous engulfing patterns (in the trend's direction)
strengthens the conviction of long trades. Traders who see a closure above the
bullish candle might place a long trade.
Further evidence of a likely trend reversal can be seen in this example's bearish
engulfing pattern (red rectangle), which first occurred at the peak of the trend.
However, subsequent price action failed to confirm this move because the
market continued to rise and succeeding candles failed to shut below the low of
the bearish engulfing candle. This highlights how crucial it is to confirm the
pattern.

WHAT IS A BULLISH ENGULFING CANDLE?

At the bottom of a downtrend, a bullish engulfing candle forms, signaling an

increase in purchasing pressure. As more buyers enter the market to propel
prices even higher, the bullish engulfing pattern frequently causes a trend
reversal. Two candles are used in the pattern, and the second candle entirely
engulfs the body of the first red candle.

The bullish engulfing pattern that appears at the bottom of a downtrend is

shown in the figure below.
The following image focuses on the bearish and bullish candles that constitute
the bullish engulfing pattern.
WHAT DOES A BULLISH ENGULFING PATTERN MEAN AND HOW
TO SEE ONE?

What makes an engulfing pattern bullish?

Strong green candle "engulfs" the body of the previous red candle (ignore the
wicks)
takes place near the end of a declining trend
When the red candle is a doji or when succeeding candles close above the peak
of the bullish candle, stronger signals are given.

What does it convey to investors?

Selling pressure is waning at this crucial level, signaling an upward trend

reversal (bullish reversal).
Trading with the bullish engulfing candle has the following benefits:

Simple to recognize

Once the bullish reversal has been confirmed, attractive entry levels can be
attained.

BE AWARE OF THE DIFFERENCE BETWEEN A BEARISH AND A

BULLISH ENGULFING PATTERN

Both bullish and bearish engulfing patterns are possible. The bullish engulfing
pattern mentioned before is basically the opposite of the bearish engulfing
pattern. It appears at the peak of an upswing rather than in a fall, giving traders
the signal to go short. A larger red candle engulfs a smaller green candle to
define it.

TRADING WITH A BULLISH ENGULFING CANDLESTICK

Bullish engulfing and forex trading

The GBP/USD daily chart shown below shows the bullish engulfing candle
pattern in action. The pattern is displayed here in a downward trend. As they
closed above the high of the bullish candle, subsequent candles confirmed the
signal. Stops can be put in place below the bottom of the bullish engulfing
pattern, with the recent swing high, which offers a favorable risk-to-reward
ratio, as the target objective.

The Bullish Engulfing technique is well-liked not just in the FX market but also
in the stock market. Below is a bullish engulfing trading technique for the
NYSE-listed Fedex Corp. (FDE).

The bullish engulfing candle formation must be paired with a supporting signal
or indication in order to trade with confidence.

A Dragonfly Doji is present in the chart below. Immediately before the

engulfing pattern, which denotes the rejection of lower prices. This is consistent
with the bullish bias and the oversold RSI signal at the bottom of the chart.
Before closing a trade, tock traders are more confident thanks to these
confirming signs.
The recent swing bottom, which is also the low of the Dragonfly Doji, can be
used as the stop loss level. If the objective (limit) has a favorable risk-to-reward
ratio, it can be set at a pivotal level that the price has previously rebounded off.
Main talking points: BEARISH ENGULFING PATTERN

One of the most obvious price action signals on the forex market is the bearish
engulfing candle. To complement their trading techniques, many traders may
employ this forex candlestick pattern to spot price reversals and continuations.

In this post, we’ll discuss:

The bearish engulfing candle is what?

In forex trading, how to recognize and understand a bearish engulfing candle
How to use the bearish engulfing pattern in forex trading
Candlesticks are discussed in great length in this article. Make certain you
understand how to read a candlestick chart.

A BEARISH ENGULFING PATTERN IS WHAT?

The strongest indication is generated by a bearish engulfing pattern when it

emerges at the top of an upswing. The pattern is made by analyzing the
information from two burned candles:
The first candle will show that the current trend strength is ending. Although
the size of this primary/bullish candle might vary, it is important that its body
is totally "engulfed" by the candle that comes next. The strongest signal is given
by dojis and other little bullish candles, which can signify market uncertainty
regarding the direction of the current trend.

The pattern's second candle serves as the reversal signal. This candle's lengthy
red candle is causing new negative price momentum. This bearish candle
should begin above the preceding candle's close and end substantially below the
previous candle's low. This sharp decline frequently signals a further drop in
price and is caused by sellers outpacing buyers. The signal gets stronger the
longer this secondary/bearish candle falls.

KNOW THE DIFFERENCE BETWEEN A BEARISH ENGULFING

PATTERN AND A BULLISH ENGULFING PATTERN

Both bullish and bearish engulfing patterns are possible. The bearish engulfing
pattern mentioned above is basically the antithesis of the bullish engulfing
pattern. It appears near the bottom of a decline rather than in an uptrend,
giving traders the signal to go long. A red flame gets enveloped by a bigger
green candle, which is its distinguishing feature.

TRADING WITH A BEARISH ENGULFING CANDLE

By using indicators, significant levels of support and resistance, or any other

strategy that will validate or invalidate a trade, traders should always be on the
lookout for trade confirmation. Here are two methods that traders can employ
to reinforce the bearish bias that the bearish engulfing pattern suggests.

Using Indicators to Trade the Bearish Engulfing Candle

The bearish engulfing pattern on the EUR/USD daily chart that may be seen
near the peak of the uptrend is highlighted in the sample below. Even though it
is not a good idea to trade against the trend, reversals do happen, thus all
traders should be able to recognize when this is likely to happen.

The bearish engulfing pattern is where the Euro's price appreciation and top-
out are depicted on the chart. A further "overbought" signal from the Relative
Strength Indicator (circled in black) supports the negative bias.
Taking a closer look at the chart, entry levels, stops, and targets can be
identified

Entry: Traders can place working orders deep below the low of the bearish
candle or they can wait for a closing that is lower than the candle’s low.

Stop loss: To invalidate the move and give a reasonable risk-to-reward ratio, a
stop loss might be set above the most recent swing high.

Target/Take Profit: Bearish engulfing candles might signify the start of a

protracted decline, so it’s helpful to think about a first take profit level while
keeping an eye out for more downward movement. If necessary, adjust stops or
think about employing a trailing stop.

Using Support & Resistance to Trade the Bearish Engulfing Candle

On the US Dollar Index (DXY), a bearish engulfing candle pattern can be seen
forming at resistance in the chart below. The degree of support is significant
since it demonstrates that higher moves have previously been rejected. It is
more convincing to have a bearish bias when the bearing engulfing pattern
forms at resistance.

Entry: Considering that the level of resistance is supporting the bearish

engulfing, traders may want to consider entering the trade at the start of the
next candle.

Stop: The stop can be positioned above both the level of resistance and the
bearish engulfing candle. A move over this would render the move useless.

A recent level of support might be used as a target or take profit point. The
bearish engulfing candle may indicate the beginning of a persistent slump,
therefore traders may take into consideration a second target level or employ a
trailing stop.
Part 1. Understanding and Drawing
Structure on the Charts

On the charts, there is one component that is constant. Structure, also

known as support and resistance, is that element. This topic is generally
ignored, according to many.

The charts may seem utterly random to someone who is unfamiliar with
the Forex market or any other market. Of course, this is untrue since
structure constantly exists and because the market repeatedly adheres to
these ideas. Structure is not always adhered to, but it can provide high
probability locations where Price Action trading can be done with good
odds. Keep in mind that trading is a probabilistic endeavor, and that
market structure determines how it moves.

Pull up the daily chart, switch to the line chart, and look for many
touches of a single point to create structure on the charts. In MT4 or a
comparable platform, you should draw horizontal lines in these areas,
and you should also create alarms in these areas.

You need to see at least two or more strong touches for a strong or major
support or resistance.

One should draw their lines from these two time zones since they provide
the best likelihood and reward for using this strategy: the daily chart and
the weekly structural lines.

A trader may lose money if daily or weekly support or resistance lines are
created incorrectly, so pay close attention to this course segment. I go
into great depth about how to draw them in this Part. The moment has
come to stop using any indicators you may have previously used for this.
This section of the movie goes into great detail on how to draw and
employ only support and resistance regions with a high probability. This
factor is crucial to any profitable trading strategy.

I go into this in great depth in course part one. As a guide, look at the
illustration of these lines below. Once you master the technique, drawing
them should come naturally to you.

The line chart in the daily chart above illustrates specific prices with
numerous touches. Once key trading zones are indicated by these prices,
you may start looking for trades with a very high likelihood.

You can draw these points on any chart or any pair. When combined with
price movement, the likelihood of a short-term bounce at these positions
exceeds 70%, creating extremely high-probability trading opportunities..
Chart identical to that on the previous page, a daily chart of gold with
candles.

To familiarize you with this crucial procedure, I will go through this

component on numerous pairs in the first part of the course..

Part 2. Identifying the Candle Signal at

Structure

It is time to check for candle indications at structure to trade after you

have drawn and identified the structure. As the strongest type of price
action among all price action candles, the engulfing candle warns the
trader that more buyers or sellers have entered the market and that the
market will likely continue to move in the direction of that indication..

Identifying the signal below.

Take as an example what occurred in the market mentioned above.

When a signal appeared at the structure, the price increased. In the

second arrow example, the signal reappeared as a sell trade, and the
price decreased. As is also evident, once a support was broken, it turned
into a resistance..

What is the Engulfing Candle?

The candle that is engulfing the flame is larger than the candles that
came before it to the left.
There are two main types of engulfing candles: the first type completely
engulfs the previous candle's body; the second type engulfs the majority
of the previous candle's body, the previous candle's body high for bullish
signals, and the previous candle's body low for bearish signals. Below
are some instances of engulfing candles..

A Smothering One of the most potent candlestick price action

indications, a candle symbolizes many buyers or sellers in the market.
When trading with structure, this candle has an extraordinarily high
probability of success because it frequently occurs without the
requirement for any other confluences besides itself. This technique
excels in such situation because it makes use of this type of price action..
An illustration of a bullish engulfing buy candle in the market, enlarged
to show how it appears, is seen above. It is far larger than the candles to
the left, as you can see by looking at them..
Above is an example of a bearish engulfing sell candle. See how the
market sold off well after signal.
Notes On How Structure Changes

Please be mindful that structure always follows structure. When price is

below structure and moving upward toward it, the structure acts as
resistance. A structure below is viewed as support when the price is
moving downward toward it.

However, when resistance is broken above and price closes above on a

retracement down to this area, it is frequently regarded as having been
resistance before becoming support. The same is true when support is
breached; if the price retraces to it, it is then viewed as resistance..

Above - The EURAUD Daily chart is an illustration of how support can

turn into resistance if it is broken. This is typical of trending markets and
offers excellent trading possibilities..
Part 3. Taking the Trade and Money
Management.

You know how to recognize structure and the engulfing candle at these
structure locations now. Now is the time to consider how to execute the
trade.

How much risk should I take?

First off, it is advised that you only risk 2% of your account for each
signal.

two 1% trades equal two 2% signals

at this manner, any losses are not significant when learning the method
at the beginning. Additionally, 2% is a psychologically extremely low
number that most traders may readily accept as a natural part of their
trading process. For instance, a deal with a 1 to 2 risk to reward ratio
might increase the balance of the trader by as much as 4% in a single
signal.

Stop Losses

One stop loss option is below candle entry and is between 10 and 15 pip.
Obviously the opposite of selling.

The second choice is to sell if it is above the previous high or to buy if it is

below the recent low. Both alternatives provide a good risk-to-reward
allowance in the majority of circumstances and are sufficient to allow
one to be stopped out only when incorrect about a market move..
Entry

First Standard Option – Below or Above Candle place order after

retrace.

There are two ways to trade using this method. After every retracement,
you can place an order above or below the candle, which causes the price
to move in that direction when it opens.

For instance, set a purchase order 9 pip above a bullish engulfing signal
(Daily and Weekly Rule only).
For instance, place a sell order 9 pip below a bearish engulfing signal
(Daily and Weekly Rule only).

You evaluate the daily chart candle closures after doing this, not before.
If the structure finishes with an engulfing, you should place buy orders 9
pip above the candle in a bullish scenario and sell orders 9 pip below in a
bearish scenario.

A few pip above or below the signal body for time frames below the daily
is the typical entry approach.
After a day, evaluate the candles and close the orders if your order on
your trade signal did not open. For the trade to be a valid signal, you
would like that it open during the next daily candle..

Above – First Option example, main entry discussed in pack.

Entry

Second Option – 50% Retrace of Engulfing candle signal with

order.

The second approach entails entering on that engulfing signal after a

50% retrace. This topic is covered in the pack's advanced entrance
course. All that is required after a signal is to put an order entry at 50%
of the candle signal. Only this form of entry is covered in the advanced
entry course that is part of the pack because it only functions when there
is a retrace. When the market experiences this retracement, the second
alternative may potentially offer a higher risk-to-reward ratio and permit
trading on the daily or weekly charts with tighter stop losses..

Above – Second choice, only covered in the pack's advanced entry

course. Although this approach can raise losses and is not always
effective, it offers a trader a greater risk to return ratio.

Remember that the 50% retrace following a signal only happens about
30% to 40% of the time.

You set the stop order in the same location as the first choice if the
transaction is filled..
Entry

Third Option – Break Below or Break Above Method

In the second segment of the advanced entry course, this is covered.

You place your order using this strategy above or below the candle signal
after signal. Although this strategy has the highest likelihood, it also
generally entails taking a little bit more risk with your stop loss. It raises
likelihood since, as it enters, it also removes a second level of stop
losses..

Above is an example of the third advanced entry option with a sell signal.
Break Even ( Optional )

The term breakeven is to mean when you decide to pull your

stop loss up above or below your entry price in order to make
your trade completely risk free…

In trade management, using breakeven is optional, but I suggest it as a

capital-protection measure.

Hard breakeven is the first option, which is 40 plus pips. (Image 1)

Because it leaves less opportunity for the market to move, it is less
advised as a choice.

Use of breakeven is at body candle danger size is the second, more

desired and advised alternative. (Image 2) This provides the market a lot
more room to move and is nearly a 1:1 risk-to-reward breakeven..

The aggressive option breakeven is shown in (Image 1) above at a profit

of at least 40 pip. When the price reaches that level, you simply raise the
stop loss level to equal the entry price to make the two trades risk-free.
the inverse of a bearish signal.
(Image 2) alternative Two demonstrates the risk to breakeven concept
and the more desired breakeven that I advise selecting as the best
alternative.

An illustration of setting breakeven at the candle risk body size is shown

in the figure above. With this approach, the breakeven amount for each
transaction is determined by the trade analysis.

Targets

I've found that for goals, taking the first profit at a risk-to-reward ratio of
1:1 works best. However, for the second trade, I allowed opposing candle
signs to indicate when to exit.

Example 1: Trade to a zone with a 1 to 1 take profit

One trade to break even, then let it run to the next structure or the signal
from the opposing candle.

Give the second trade time to run until it either reaches breakeven or
advances significantly in your favor before signaling with an opposing
candle.

As a result, you receive the highest return possible from the market while
also limiting risk during range markets, which do occur occasionally.

When utilizing targets, it's important to pay attention to opposing

structural points. Another place where additional earnings can be
deducted or, if necessary, adjusted on a subsequent trade..
The example above shows how it works in practice by allowing the first
trade to be executed at a 1:1 ratio and then letting the second trade
continue until the opposing engulfing candle signal. The second
transaction had a risk to reward ratio greater than 1 to 3, which meant
that just letting the trade run brought in enormous rewards.
Runner Option for Trade

You may also start pushing your stop loss up (uptrend), down below
(downtrend), or above closed time frames candles in the direction of
your trade once the second runner trade is a good number of pip in your
favor. This makes sure that more pips are locked in and that you are only
taken out of the market when a reversal results in a break above or
below.

To illustrate, once you are in profit and past break even in an uptrend,
you might pull your stop up to below each daily candle close (about 10 to
15 pips below each daily candle low).

The converse is true for a trade on a downward movement. After

reaching breakeven on the second trade, one can start to raise the stop to
the daily candle close (by around 10 to 15 pips), which ensures and
permits movement in the market but leaves it open to being exited only
in the event of a break above, which frequently denotes a shift in trend.

To lock in more pip, make sure each candle close provides the market
enough room to move if you are pulling your stop up. This is also
applicable to all time spans..
Potential Rewards

Now let’s see some of the potential with this strategy.

EURAUD Weekly above sell trades.

EURAUD Daily Chart buy trades.

 Www.ForexWinners.Ru

EURAUD Daily Sell Trades.

EURAUD Weekly Chart Buy Trades.

EURNZD Weekly Chart Buy Trades.
EURUSD 1 hour Chart Above.

GBPAUD Daily Chart

GBPNZD Daily Chart Above.
GBPNZD Weekly Chart Above.

GBPUSD 15 Minute Chart Above.

NZDUSD Daily Chart Above.

Sticking to the Process

You ought to be familiar with the three main steps of the strategy's
overall process by this point. Finding the major structure, analyzing it for
the signal, and then deciding how to execute the trade.

That's basically all there is to it—keep things straightforward and

continue adhering to the structure's and price action's principles.
Additionally, keep in mind that, like any other organization, losses are a
normal part of operations. For this reason, effective money management
is crucial. (See expenses such as rent or bills.)

Overall, trading involves hanging onto winners and letting go of bad

trades as soon as we are incorrect. Overall, that is what creates an
account, so remain composed, stay on task, and good luck with your
trading..