Nov 29 2023

ᑕ❶ᑐ M and W Patterns in Trading: Meaning, Formation, Charts
Learn about ❶M and ❷W Patterns in Trading and their Difference from ❸Double Top and ❹Double Bottom Chart Patterns - ✔Stops, ✔Targets, and ✔Entry Points.
Compare Brokers
Vs.
Featured Brokers
74% of retail CFD accounts lose money.
74-89% of retail CFD accounts lose money.
By Stelian Olar , Updated on: Nov 06 2023.
Have you ever looked at a chart and seen a candle completely engulf the previous candle?
Me too.
At first, these engulfing candlestick patterns looked so cool - like a snake swallowing its prey whole.
Engulfing patterns can be major signals that mark a potential reversal in trend. I used to ignore them, but once I started paying attention, they helped me avoid mistakes and even catch some winning trades.
I know Forex charts can start to feel like a foreign language, but trust me, learning to recognize the engulfed candlestick will level up your price action trading game.
In this article, we'll break down:
I'll share the best trading strategies I've learned over my years of trading, including how engulfing candles work with support, resistance and other technical indicators.
My goal is to turn these patterns from cryptic candles into clear trading signals for you.
The key is knowing what to look for and how to interpret it in the context of the current market environment. By the end, you'll have a new tool in your trading toolbox.
Let's dive in!
The engulfing candlestick forms when a single candle completely engulfs or "swallows" the candle before it. Its broad real body visually pushes the price in the opposite direction of the previous candle. This signals potential trend reversals, making engulfing patterns one of the most popular chart patterns in technical analysis.
The engulfing candlestick pattern meaning is that the momentum in direction has shifted, with the new candle engulfing or "consuming" the previous candle. The shadows or wicks of the candles are not relevant. It's the relationship between the candle bodies that matters.
The color contrast of the candle bodies reinforces the reversal message. When properly identified, engulfing patterns can alert traders to a shift in market sentiment and new emerging trends.
As mentioned, there are two main types of engulfing candlesticks to watch for - bullish and bearish. Let's break down the difference:
A bullish engulfing candlestick forms when a green (or white) up candle completely engulfs a small red (or black) down candle. The bullish candle's body must cover the entire real body of the previous bearish candle, without regard to shadows.
This shows upside momentum overtaking the prior down move. The bulls have woken up and are taking control back from the bears signaling potential bottoming action and reversal up from a downtrend.
A bearish engulfing candlestick is the opposite, formed by a red (or black) down candle engulfing a small green (or white) up candle. Again, the engulfing candle's body must fully cover or consume the body of the previous candle, ignoring shadows.
This reflects strong downside momentum overwhelming the prior upswing. The bears have now wrestled control back from the bulls signaling potential topping action and reversal down from an uptrend.
The larger the engulfing candle compared to the previous candle, the more powerful the reversal signal. Gaining familiarity with bullish and bearish engulfing candlestick patterns takes chart time, but being able to quickly recognize engulfing candles adds a valuable tool for timing entries and exits.
Let's look closer at how to spot them on the charts.
Below you can see some real examples of engulfing candlestick patterns:
Beyond the standard bullish engulfing pattern and bearish engulfing pattern, there are a few common variations to be aware of. These include:
The standard way of trading engulfing candlestick is to enter positions in the direction of the expected reversal and place stop losses on the other side of the engulfing bar:
Trading engulfing bar allows getting in early on the momentum shift signaled by the engulfing pattern, while defining the risk on the trade. The size of the stop loss compared to your entry determines the risk to reward ratio for the setup.
Here are some effective trading strategies to use with the engulfing bar candlestick pattern:
Plot major support and resistance levels on your chart and watch engulfing candles taking out these key zones acting as continuation patterns or bouncing leading to a sustained trend reversal. As a general rule, the more times a level has been tested, the weaker it becomes.
Another engulfing candlestick strategy is the crossovers between price and a moving average indicator which can confirm whether an engulfing reversal may succeed or fail. If the price is rejected at the moving average and in the process it forms an engulfing candle, it warns the reversal may be underway.
If momentum is diverging during an engulfing pattern, it signals strength in the reversal. For example, in an uptrend, if price makes a new high on a bearish engulfing bar but momentum is failing to confirm with lower highs, the uptrend is likely about to reverse.
Engulfing patterns become much more robust when combined with other confluence factors to confirm whether the reversal will succeed or fail. Layering engulfing candlestick indicators and smart risk management transforms simple engulfing bars into an actionable strategy.
According to Thomas Bulkowski, an expert in chart pattern analysis, the reliability of engulfing candlestick patterns depends on certain factors:
No single trading indicator or candlestick pattern works perfectly on its own and the engulfing candlestick patterns are no exception. Here are a few trading tips to stack the odds in your favor:
If you're ready to take the next step in mastering Forex price action strategies, check out Pepperstone (or eToro if you’re a US resident) - an award-winning Forex broker offering cutting-edge charts, ideal trading conditions, and an advanced trading platform.
Nov 29 2023
Learn about ❶M and ❷W Patterns in Trading and their Difference from ❸Double Top and ❹Double Bottom Chart Patterns - ✔Stops, ✔Targets, and ✔Entry Points.
Nov 29 2023
Learn about ❶What is an Inverse Head and Shoulders Pattern, ❷Its Components, ❸Formation, and ❹How to Trade the Inverse Head and Shoulders Chart Pattern.
Nov 29 2023
Learn about the ❶Head and Shoulders Pattern, ❷Its Formation, ❸Its Advantages and Disadvantages, and ❹Strategies for Trading Head and Shoulders Patterns.
Nov 16 2023
Learn about Double Bottom Pattern: ❶How to Identify It, and about the ❷Differences Between ✔Double Top and ✔Double Bottom Patterns. ➤Read the Article!
Nov 16 2023
Learn about ❶What is a Double Top Pattern, ❷How to Identify a Double Top Formation on a Chart, and about the ❸Common Mistakes When Trading Double Tops.
Nov 10 2023
Learn about ❶Bullish and ❷Bearish Reversal Candlestick Patterns to Know ✔How to Use These Reversal Candlestick Patterns in Your Technical Analysis.
Nov 06 2023
Learn about ❶What Is a Shooting Star Candlestick Pattern, ❷Formation of Shooting Star Candlestick, ❸Bullish and Bearish Patterns, and ❹How to Trade It.
Nov 06 2023
Learn about ❶What is a Hammer Candlestick, ❷Different Types of the Hammer Candlestick Pattern, and ❸How To Use Hammer Candles in Your Technical Analysis.
Nov 06 2023
Learn about ❶Bullish Candlestick Patterns to ✔Identify Trading Opportunities and about the ❷Risks Associated with Trading Bullish Candlestick Patterns.
Nov 02 2023
The Hanging Man Pattern is a ✔Single-Candle Formation at the ✔Top of an Uptrend. ➤Learn more about this Pattern and the ✔Types of Hanging Man Candles.
Nov 01 2023
Forex Lot Size Calculator
Nov 01 2023
Crypto And Currency Converter
Oct 19 2023
Leverage And Margin Calculator
Sep 01 2023
Pip Calculator
Aug 09 2023
Profit Calculator