First of all, it reflects the psychological state of market participants, as well as the balance of power between sellers and buyers in the market. In addition, engulfing is one of the key reversal patterns that warn of an imminent trend reversal. For additional information, I have also added a Bollinger Band indicator with standard settings (20 SMA, 2 StdDev). Additionally, traders should continually evaluate and adjust their strategy based on market conditions and performance. Overall, Engulfing Candles can be a powerful tool for traders, but they should be used in conjunction with other technical indicators and proper risk management strategies.

Bullish Engulfing Pattern vs. Bearish Engulfing Patterns

The colour of the candle will indicate whether the price direction has been up (green) or down (red). Imagine you observe a Bearish Engulfing Pattern at the end of an uptrend. This candlestick, regardless of its size, is followed by a larger red candle that entirely eclipses the preceding candle. If it closes below the low of the Engulfing Candle, that’s your confirmation, and you may initiate a short position, setting your stop loss just above the high of the Engulfing Candle.

1. You can create strategies with only this pattern that may easily outperform the market.
2. Secondarily, it’s also a great confirmation pattern that can pair with many trading systems.
3. This dramatic change in candle size symbolises a sudden influx of sellers eager to drive prices down.
4. However, it is important to further confirm the pattern using other candlestick patterns or technical indicators.
5. Overall, traders should pay attention to Engulfing Candles in different market conditions and use them in conjunction with other technical indicators to confirm their trading decisions.
6. Another strategy you can combine with the bullish engulfing pattern is the trendline bounce strategy.
7. From here, there were multiple instances where a bullish engulfing pattern formed after touching the EMA.

The screenshot below shows good examples of both a bullish and bearish engulfing candlestick. The Supply and Demand indicator helps traders identify areas of support and resistance in the market. When used in conjunction with Engulfing Candles, it can confirm potential trend reversals and provide additional entry and exit points. Below is a great example of a bearish engulfing pattern signaling a trend reversal on the Netflix daily chart. This engulfing candle indicator has made it easy to identify the pattern without any screen time.

What Is a Bullish Engulfing Candlestick Pattern?

Although candlestick patterns can be lucrative, it requires a certain level of experience to use them effectively. If you’re a beginner, it’s crucial to keep this in mind and approach patterns trading with a realistic mindset. In this article, you will engulfing candle strategy learn to trade with engulfing candlestick indicator, and at the end of the article, you will get a link to access this indicator for free.

1. The most reliable engulfing patterns occur when the entire body of the current candlestick engulfs the previous candle’s range.
2. For a strong confirmation, the absence of long upper wicks suggests sustained buying pressure, reinforcing its validity as a reversal signal.
3. It should be noted that these patterns are formed at almost every new level that the bulls have overcome within the trend.
4. If you’re a beginner, it’s crucial to keep this in mind and approach patterns trading with a realistic mindset.
5. An engulfing pattern is a price formation consisting of two candles, where the body of the second candle completely “engulfs” the body of the previous candle.

However, by the end of the selected time period, quotes fall below the opening price of the first candle. That is, the body of the second candle engulfs the body of the first candle while trading volumes begin to grow. In the screenshot below, the stock was in an overall bullish trending environment and the bearish correction wave pullbacks were shallow and never reached the lower BB. The price formed two BE+ patterns right at the 20 simple moving average (middle BB) during the corrections. The price was also nicely extended (at the bottom of the BB), so taking a long trade here would be considered a bullish trend-following trade. Bollinger Bands are a technical analysis tool comprising three bands.

The Psychology Behind the Bearish Engulfing Pattern

When combining the two concepts, a bullish engulfing candlestick with high volume represents a higher likelihood of a reversal. When the RSI is below 30, it indicates oversold conditions, and when it’s above 70, it indicates overbought conditions. A bullish engulfing pattern combined with an oversold RSI can signal a potential bullish trend reversal. After the appearance of bearish engulfing candlesticks patterns, the price reversed down and began to actively decline. The bearish trend was stopped by two reversal patterns, the hammer and the inverted hammer.

Also take note where we placed our take profit – just below the next key resistance level. Also take note of the distance between this key level that was broken and the next resistance level. This was a 400 pip range, giving us plenty of room to profit from this setup.

In the bearish Engulfing pattern, the first candle is green or white, and the second is red or black. The real body of the second candle is longer than the real body of the first one, both at the day’s opening side and the day’s closing side. The size comparison must be made based on the real body of the candle, not the shadows. This is now a high probability trade, meaning the success rate is well above 50%. Furthermore, the setup above gave us a chance at a 3R trade (23 pip stop loss and a 68 pip profit target). Always set a stop loss below the low of the engulfing pattern to manage risk.

However, in the context of a pullback during a larger uptrend, the bullish engulfing pattern holds significant weight, and often leads to strong continuations. The accuracy of the bullish engulfing candlestick can be improved drastically when traded on key support levels, and also when other technical analysis confluences are applied. For example, in a Fibonacci retracement trading system, traders often look for a bullish retest of the 618 level after a pump. It’s at this level we might notice a bullish engulfing candlestick pattern, which gives us the confidence to enter a trade. While it can be a strong indication of a potential trend reversal, it is not foolproof and should be used in conjunction with other tools and fundamental analysis.

During an uptrend, you should take only long positions, buying with the intention of selling later at a higher price. However, if you get a “stair-stepping” move into Support, the price will encounter selling pressure shortly after the rally (at the nearest swing high). So, when this pattern occurs on the higher timeframe (like Weekly) and leans against an area of value (like Support), that’s a signal the market is likely to reverse higher.

Several other chart patterns are like the bearish engulfing pattern, each with its subtleties and implications for trading. These include the bearish harami, dark cloud cover, the evening star, the shooting star, the three black crows, the tweezer top, the double top, and the head and shoulders chart patterns. Now, let’s merge the bearish engulfing pattern with the bollinger bands into a cohesive trading strategy. In our example, a perfect bearish engulfing setup formed right below the key Fibonacci resistance levels.

Dark Cloud candle, one of the most important patterns, usually appears at the reversal point of an uptrend. Here is a simple strategy that you can adjust to your trading style to find the edge. But I will advise you to manually check the trading setup instead of entirely relying on the indicator because every trade setup will not be winning. You should add other technical confluences to increase the winning probability of a trade setup. The body-to-wick ratio of both candlesticks should be greater than 60%.

The bullish Engulfing pattern comes into the category of two-candle reversal patterns. You should look for this pattern when the market is in a downtrend (the bears are in control) since it should come near the end of that trend to signal its reversal. The illustration below shows a bearish engulfing pattern that formed at a swing high.

Example scanner based on Engulfing Candlestick Patterns

The bearish engulfing candlestick pattern appeared right at the median of the Bollinger Bands, signaling that the stock may be about to change direction and move lower. While the bullish engulfing pattern signals potential price increases, the bearish engulfing is a warning sign of a possible downturn. This pattern is most potent when it emerges at the peak of an uptrend, indicating a surge in selling pressure and suggesting a shift in market sentiment. The bullish engulfing candlestick pattern is a powerful tool you should add to your trading bag of tricks. While it may not always guarantee a reversal, the candle serves well as a confirmation candle in many trading systems. The bullish harami pattern consists of a large red candle followed by a smaller green candle that is completely contained within the body of the red candle.