Analysing engulfing candlesticks patterns: how it is done
Bullish engulfing candlesticks patterns are patterns of analysis that engulf prior candlesticks and change the price momentum.
Engulfing candlestick patterns can be either bearish or bullish. It is marked by a candle that closes higher or lower than the prior candles close. The body of the candle should completely overlap the prior candle’s body.
The more candles the candlestick pattern engulfs, the more impact it will usually carry. Ideally, you want to trade Forex currencies in the same direction as the engulfing candles, as they will carry overall momentum which may follow.
Understanding the engulfing candlestick pattern
Candlestick patterns are most common to trade on the daily chart. They will move in the direction of the overall Forex trend which should elucidate great points of entry.
As mentioned, you want to look for these candles on the daily and weekly timeframes to find substance. After identifying an engulfing pattern form on any lower timeframe, it can prove difficult to find a solid setup. Many days or weeks of low volume typically precede this pattern, especially over the news, and push the market in an overall direction.
Testing the engulfing candlestick pattern
You may find engulfing candles at the end of a trend to provide the currency pair with respite. For example, at the end of an uptrend, the price may quickly fall back into support engulfing prior candles and take out any stops of traders’ FOMO buying at the top.
We are not directing you to sell at the top of the candlestick, as momentum moves in large trends, and many Forex traders will fail if they try to ‘pick’ the very tops or bottoms of the trends. But, after the engulfing has invalidated the prior high or low, then the daily or weekly Forex trends can change.
You will want to study and back-test the engulfing candlestick pattern before jumping into the market, as knowing when to act on them can be tricky. Knowing whether it is a change in sentiment for the trading session might be difficult and can trap traders into the Forex market. The more conservative Forex traders may want to wait until the closure of the following day before trying to take advantage of any further movements.
Using the pattern in combination with other tools
The best way to get the most out of these candle formations is to use them in combination with other technical tools and confluences. If you are looking for a short position within a downtrend, and you see a daily bearish engulfing candlestick pattern at a lower high, then this will build confidence to trade that setup down.
Other ways to use the pattern is to combine key levels and look for momentum to occur after the engulfing has been printed. This is a good way to trade within the momentum, as long as it is in alignment with your bigger picture viewpoint.
When calculating risk to reward ratios, make sure you have wide enough stops to cover the bar to allow for pullback. If the market was to reach your stop, then it would certainly indicate that engulfing candlestick pattern was not respected, and you might need to rethink your overall bias and sentiment on that particular pair.
Engulfing candlestick pattern conclusion
Establishing trades from engulfing candlestick patterns isn’t always easy, but spotting them move within your bias can help with confidence in executing a trade. When price action is choppy, the market can move sideways within a range for a long period.
The engulfing candle patterns can help with identifying when breakouts will occur. Watch out for minor retracements, but expect momentum to follow through and price to continue developing in the indicated direction.