The engulfing pattern is one of my favourite candlestick patterns of all time and has made me a lot of pips.
There are so many tweaks and strategies based on this pattern it’s insane to think about.
Most importantly, it’s something that every forex trader should know.
So I wrote this guide to take you through the A-Zs of the engulfing pattern.
Check it out:
What is an engulfing pattern?
An engulfing pattern is a two candlestick pattern that occurs when the most recent candlestick closes higher (or lower if bearish) than the previous candlestick’s close.
What this means in terms of a market view is that the opposition has entered the market at a larger force, forcing the candle to move sharply against the current price action.
They are very obvious to spot and indicate a strong momentum shift.
Normally, the larger the engulfing bar, the strong the conviction of a signal.
However, you must also consider that there are other factors in such price patterns.
Such as breaking news – you always see an engulfing pattern when the NFP is announced, it doesn’t mean you should trade it.
Or when an engulfing bar rallies up to a resistance level, you should be careful to trade as it has rallied to an area where previous price action was unsuccessful for going higher.
Essentially, use common sense.
Engulfing patterns occur quite often, which makes them both attractive and unattractive to trade.
Later on, I’ll go over the best aspects to trade these technical chart patterns
How accurate are they?
The accuracy varies significantly. If you were to test and trade EVERY single set-up, the validity would be pretty weak.
However, Tom Bulkowski states that his findings are that a bullish engulfing pattern has a 63% chance of generating a bullish reversal.
Whereas a bearish engulfing pattern has a staggering 79% chance of generating a bearish reversal.
This is past data from testing, therefore, these are not guaranteed strike rates and take them with a pinch of salt.
What is the best time frame to use them?
My rule is there is no best time frame.
You have to choose what time frame you wish to work under and where you find your results best.
Some forex traders thrive in 5-minute charts but get slaughtered in 4-hour charts.
It’s personal preference, like driving a car, you will always get to your destination in any car – it’s how you choose to arrive.
How to identify an engulfing pattern
To identify an engulfing pattern you have to make sure that several things match up.
Firstly, you have to ensure that the body of the engulfing bar overtakes the previous candlesticks.
It doesn’t matter if it’s closed lower than the previous candlestick’s high, the key identifier is the body of the candlestick.
Let’s take a look at an example:
See how easy they are?
An engulfing candlestick pattern can occur mid trend or at the end of a trend.
Both of these give you intel to work with.
If an engulfing pattern emerges at the end of a trend, this becomes an engulfing bar reversal candlestick pattern.
This is good if you want to get out of a trade, as it warns you that the trend is reversing.
Most commonly, it’s used as an indicator to enter a trade.
If an engulfing candlestick pattern appears in the middle of a trend, this becomes a continuation pattern.
This is good if you want to increase your position size to take advantage of the continued strength behind the current trend.
Or get in mid-trend if you missed the initial move.
What is a bullish engulfing pattern?
A bullish engulfing pattern is when the pattern forms towards the end of a downward trend.
The sequence is usually a sell candle followed by a strong buy candlestick, indicating a bullish engulfing pattern and thus buyers are bringing in the pressure to go higher.
Here is an example of a bullish engulfing pattern:
You can also commonly find them reacting to support levels at an end of a trend.
They can also appear in the middle of an uptrend during a pullback of a trend where other traders are selling off their positions, but there is still seller weakness.
When a bullish engulfing pattern occurs during an uptrend it’s usually a signal that the buyers are still in control and the trend should continue higher.
What is a bearish engulfing pattern?
A bearish engulfing pattern is when the pattern forms towards the end of an uptrend.
The sequence is usually a buy candle followed by a strong sell candlestick, indicating a bearish engulfing pattern and thus sellers are bringing in the pressure to go lower.
Here is an example of a bearish engulfing pattern:
You can also commonly find them reacting to resistance levels at an end of a trend.
They can also appear in the middle of a downtrend during a pullback of a trend where other traders are selling off their positions, but there is still buyer weakness.
When a bearish engulfing pattern occurs during a downtrend it’s usually a signal that the sellers are still in control and the trend should continue lower.
How to trade an engulfing pattern?
It’s time to learn how to trade an engulfing pattern.
But first, with all candlestick patterns, they always tell you what is happening in the current market.
You must use this intel to think for yourself:
Why now? What is there at this price level that interested the sheer increase in opposite orders? How can I add validity to this engulfing pattern?
You can use different ways to confirm the validity through trading indicators like the Relative Strength Index, or supply and demand zones — which would probably give a more accurate picture of the market shift.
Below I am going to give you a quick step-by-step playbook on how to find engulfing patterns accurately.
Let’s start off with how to trade bullish engulfing patterns:
How to trade bullish engulfing patterns
1. Identify a swing low
The best way to find bullish engulfing candlestick patterns is to find them at swing lows of a trend.
(You can learn more about swing trading patterns here)
After you’ve identified the swing low, it’s time to wait to see if the bullish engulfing pattern is formed.
The swing low can be formed by a hammer candlestick on a support level for example.
2. Identify the bullish engulfing pattern
When a swing low is created we can wait for the current trading session to close, then if the bullish engulfing candlestick pattern is formed, then we will be ready to enter the trade.
3. Set the stop loss
Once the bullish engulfing candlestick pattern has formed and the signal is validated you want to set your stop loss 1 or 2 pips below the low of the candlestick as you can see below:
4. Execute the trade
You want to place your entry 1 or 2 pips higher above the bullish engulfing candlestick pattern’s high.
This gives a confirmation that the markets are looking to go higher.
Then we wait for the market to hit our buy order.
Note: When the price is open higher than the highest previous price, this is a valid entry too.
Or you could wait for the stock to pull back slightly before the close of the candlestick formation.
5. Take profit
You can set your take profit level based on your risk management level, each trader is different, but for simplicity sake, it would be ideal to look for the nearest resistance level.
Then you just let the market enter your buy order and let it play out.
Here is the outcome of the trade:
As you can see it was a violent move upwards towards out take profit level. It is safe to say this strong and fast move doesn’t happen every time.
Furthermore, you will notice that the price broke the small downtrend and its previous higher high, which suggests a strong move.
How to trade bearish engulfing patterns
1. Identify a swing high
The best way to find bearish engulfing candlestick patterns is to find them at the swing highs of a trend.
After you’ve identified the swing high, it’s time to wait to see if the bearish engulfing pattern is formed.
The swing high can be formed by a shooting star candlestick on a resistance level for example.
2. Identify the bearish engulfing pattern
When a swing high is created we can wait for the current trading session to close, then if the bearish engulfing candlestick pattern is formed, then we will be ready to enter the trade.
3. Set the stop loss
Once the bearish engulfing candlestick pattern has formed and the signal is validated you want to set your stop loss 1 or 2 pips above the high of the candlestick as you can see below:
4. Execute the trade
You want to place your entry 1 or 2 pips lower below the bearish engulfing candlestick pattern’s low.
This gives a confirmation that the markets are looking to go lower.
Then we wait for the market to hit our sell order.
Note: When the price is open lower than the lowest previous price, this is a valid entry too.
Or you could wait for the price to pull back slightly before the close of the candlestick formation.
5. Take profit
You can set your take profit level based on your risk management level, each trader is different, but for simplicity sake, it would be ideal to look for the nearest support level.
With the trade set, all you need to do is wait for the market to execute your sell order.
In this example it executed in the next session and aggressively traded lower towards our support level:
The above shows you a good reason why targeting these support and resistance levels, as they are able to comfortable predict where price may react with them.
In this scenario, the risk reward ratio was 2.32, which isn’t bad for just a few minutes of work!
Best Places To Trade Engulfing Patterns
For me personally, I’ve had the best success with engulfing patterns at swing highs and swing lows.
These not only help validate the swings in the trend, but they also allow for strong signals to trade that can occur frequently.
They are really easy to spot and above all, easy to trade.
I would take the time out to load up your favourite trading platform and identify swing highs and lows, then review the ones with an engulfing pattern.
You’ll notice quickly how powerful they can be.
Unfortunately, they are not a guaranteed way to be successful with every trade (nothing is). However:
Trading this pattern, combined with swing trading and support and resistance levels – would form a formidable basic trading strategy that is suitable for all traders.
Conclusion: Engulfing Pattern, should you trade it?
This guide has gone over a large portion of what engulfing patterns are about. I think that finding these engulfing patterns around swing areas could help you trade the markets and gain confidence in trading the markets.
This Japanese candlestick pattern should certainly be in your toolbox of trades because not only is it a strong signal, but it gives you a good idea of current market conditions.
So yes, you should use the engulfing pattern throughout your trading day if the opportunity presents itself.
But the key is to use these other price action patterns to find trading opportunities on a daily basis which you can find more of on our website.
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