Engulfing Pattern –
Engulfing Pattern is a very strong multiple candlestick pattern that helps to identify trend reversal. This pattern involves two candlesticks in which one candle entirely engulfs the body of other candle, that’s why it is called engulfing pattern. Both the candles should be opposite in color. Engulfing Patterns shows strong reversal signal in technical analysis.
The perfect Engulfing means there is no part of the first candle can exceed the wick of second candle.
Engulfing patterns are divided on two types,
- Bullish Engulfing = Bullish engulfing appears in the downtrend in which the second green candle engulfs the first red one candle completely.
Bullish Engulfing tells us the market sentiments about buyers and sellers, First red candle shows that the price is in downtrend, next candle tells us the whole story. When second candle opens below close of first red candle and goes down it shows that bears are in control. When price starts moving up and it closes above the open of first red candle, this shows that bulls have taken a charge and now they are dominating bears. This sentiments shows that now price will move in uptrend.
Above chart shows that after forming bullish engulfing price moves in up direction which is shown in blue circle. As you can see the price was taking the support of that range, Bullish Engulfing was forming at the support level and from there price reversed.
Bullish Engulfing also appears at the uptrend which shows that the uptrend will continue further. Traders go long if the next candle after engulfing breaks the high of engulfing candle and put stop loss below the low of engulfing candle and goes for target of next resistance or according to their risk to reward.
2. Bearish Engulfing = Bearish Engulfing appears in the uptrend in which second red candle engulfs the first green one candle completely.
When first green candle forms, it shows us that the market is moving in uptrend means bulls are in control, when next candle opens above the close of first green candle and goes up, it shows that the market is still in uptrend. When price starts falling and closes below the open of first green candle, it shows that bears have taken the charge and now they are in control. So now bears are dominating the bulls and price will move in downtrend.
Above chart shows that after forming bearish engulfing the price reversed from that point and made new low. As we know whenever bearish engulfing forms during downtrend price, it gives us the signal of continuation of trend which as shown in above chart.
Traders go short when next candle after the bearish engulfing breaks the low of bearish engulfing and put their stop loss above the high of engulfing candle and go for the target of next support or according to risk reward.
Trading is game of probability, so you have to trade like that by using stop loss which helps to limit our loss as well as save our capital.