Continuing with my series of powerful candlestick patterns, today we are going to be looking at the Engulfing Candlestick formation.
With my proficiency in technical analysis, I am choosing to share key points that find to be the most useful in real life trading…
I am an avid believer in technical analysis. So I am not going to waste anyone’s time with things that get too complicated to even be useful…
I base all of my trades off technicals, but at the same time… I believe in keeping it simple.
Simple yet powerful…
Sit tight and I will show you how it’s done…
Identifying the Engulfing Candle
The engulfing candlestick pattern is a two-candle reversal pattern.
The body of the second candle fully engulfs the body of the first candle… in the opposite direction. So a red candle will be engulfed by a green candle and vice versa…
Tails don’t matter here, all we are concerned with are the bodies of the candles.
For a bullish engulfing pattern to form, the stock must gap down on the second day of the pattern, to open below the first day… it must then close above the high of the first day candle body…
If the price does not gap down, the body of the white candlestick would not have a chance to engulf the body of the previous day’s red candle.
Engulfing Candle Key Points:
- Two candle formation
- The second candle fully engulfs the first in the opposite direction
- Opens below, closes above
- Wicks don’t matter
Significance
With a bullish pattern, because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the green candlestick represents the sellers owning the morning only to have the buyers take over in a decisive manner…
The green candlestick of a bullish engulfing pattern typically closes at or near highs of the day… so you will see only a small wick if any…
Looking for strength on a reversal candle like this is key… so the stronger it closes the better.
This confirms the strength of the buyers, and a shift of momentum.
Added Significance:
- How many candles it engulfs- the more candles the more powerful
- Forms at support or resistance- extra significance in the turn
- Volume- more volume signifies the interest in the move
Trading with the Engulfing Candlestick Pattern
Ultimately, traders want to know whether a bullish engulfing pattern represents a change of sentiment, and whether they should buy the stock.
Check out the chart below, here a bullish engulfing candlestick pattern forms. As you can see the white candle to the far right opens below the red candle and closes above…
So does this signify a potential trend reversal?
Let’s check out the next chart…
Clearly this engulfing candle was the beginning of a very nice trend reversal.
Couple things in this formation to take note of…
The engulfing candle was quite a bit bigger than the red candle and it also closed strong. This puts more significance on the candle strength…
Next a really great added benefit to the potential trade… this pattern formed right at a key support level.
The stock was already having trouble continuing lower here… so when the reversal pattern formed, there was that added level of protection.
So there are a couple ways people like to trade this…
If volume increases along with the price, aggressive traders may choose to buy near the end of the day of the bullish engulfing candle…
In this case they are anticipating the upward momentum to continue the following day.
While more conservative traders may wait until the following day. They want to make sure the engulfing candle closes strong…
And the next day they will be looking for more upward momentum before placing a trade. begun.
An engulfing candlestick pattern is a signal of a potentialtrend reversal… it is in no way a buy signal on it’s own, even if some traders use it like that… many have created strategies around the engulfing pattern.
But those strategies have added factors based on back testing, they aren’t just jumping in.
So it’s important to trade based on your setups and any other indicators that are part of your system…
By using candlestick patterns like the engulfing candlestick in conjunction with your trading system, you can potentially get more confirmation and up the odds in your favor…
For a setup like the one above, I would also be looking at the RSI… as you can see it is oversold and gaining support there on the chart…
You can also see the MACD is beginning to cross up there… along with all of that I would also look at a few simple moving averages for confirmation…
So as you can see candlestick formations are great tools, but should be used with other indicators as well.
Source: PetraPicks.com | Original Link