The engulfing pattern is usually a strong reversal pattern and is found at the top or bottom of the trend. The pattern is formed on the combination of two unique candlesticks. The first candle is relatively small and it’s a part of the prevailing trend. The second candle is a big candle that completely engulfs the first candle. Always remember, the second candle needs to completely engulf the first candle to consider it as a valid engulfing pattern.
Based on the nature of the trend and formations of the candles and the direction of the trend, we can divide the engulfing pattern into two major types. These are:
- The bullish engulfing pattern
- The bearish engulfing pattern
Those who are new to the price action trading strategy might find it hard to understand the combination candlestick pattern. But there is nothing to worry and you can easily learn the details.
As we have said earlier, the bullish engulfing pattern is usually found at the bottom of a downtrend. For the bullish engulfing pattern, just near the critical support level, you will notice a small black bearish candle. Followed by the bearish candle, you will have a strong bullish candle that engulfs the bearish candle. If you spot such a pattern near the critical support, you should execute long trades.
For the bearish engulfing pattern, you can see a portion of the bullish rally marked with a green rectangular box. The first candle for the bearish engulfing pattern will be a small bullish candle (part of the past trend). The second candle will be a strong bearish candle and it will engulf the bullish candle. Traders usually execute short orders when the find such patterns at the critical resistance level.
Choosing the broker and trade execution process
Those who are convinced that they can trade the market with the help of the engulfing pattern should use this link to open a professional trading account with a high-end broker. If you rely on a low-end trading platform to place your trades based on the price action signals, it will be really tough to make a profit. In fact, you should never try to trade the engulfing pattern without learning its use by using the demo account. Open a demo account with Saxo and try to learn its use without any risk exposure. Once you feel confident in your approach, start trading with real money.
After you have gained access to a premium broker and have strong confidence, it’s time to trade the real market. Though it’s a very powerful candlestick pattern, you should still limit the risk in every possible way. Taking too much risk in each trade and trying to earn a big profit is one of the key reasons for which you lose money. Look for the engulfing pattern at the critical levels only. Never try to trade this pattern based on minor support and resistance level.
Placement of the stops
The placement of the stops is a little bit tricky since the engulfing pattern consists of two Japanese candlesticks. Usually, the professional price action traders place the stop above the second candle of the bearish engulfing pattern when it comes to the execution of a short trade. In the case of long trades, the stops are usually placed below the low of the second of the candle of the bullish engulfing pattern.
If you read this article carefully, you should have a clear knowledge about the engulfing pattern. But having strong knowledge is not enough to earn money. You have to try to trade this pattern in the practice account so that you don’t have to lose any real money. Try to use this tool in a very effective way and always remember the risk management policy. Play it safe when it comes to complex market conditions and never listen to your emotions.