When it comes to predicting the forex market with the help of candlestick patterns, there are certain categories that are extremely important. Among these categories are the engulfing candlestick patterns.
Similar to many other patterns, engulfing patterns can provide forex traders with reliable information with regard to possible points of reversal in the trajectory and momentum of the market.
There are two major types of engulfing patterns; one is the bearish engulfing and the other is the bullish engulfing. Both of these patterns have the potential to provide strong signals to forex traders.
So, given their importance, in this article we are going to discuss this type of candlestick patterns, go through their definition, how you can identify them, and how they can be applied to the market.
Engulfing Candlestick Patterns: A Definition
One of the most important factors to consider with any candlestick and with any category of candlestick patterns is the number of candles used in the formation of the pattern. All engulfing patterns are made from two candles.
In this way, they are also categorized under double candle patterns. They are also double in another sense. The other side of duality with candlestick patterns is that there are two types of patterns. One is called bullish engulfing and the other is called bearish engulfing. We will discuss each of these types at length in the following sections. But before, more on engulfing patterns in general.
As the name suggests, an engulfing pattern exhibits the engulfing of candles. And as we said before, each engulfing pattern is made from two candlesticks. So in any pattern, we have one candle being engulfed by another candle.
This precise pattern of engulfing is where we see the most important information with these patterns. It can either be a strong bearish candle swallowing or engulfing a bullish one or a strong bullish candle taking over a bearish one.
This is the difference between a bullish engulfing pattern and a bearish engulfing pattern. Both of these patterns are reversal patterns. This means they signal a reversal in the main trend and trajectory in the market.
So forex traders can consider these patterns as strong signs in order to predict an upcoming change in the market trend and adjust their trading strategy accordingly.
What Is the Bullish Engulfing Pattern?
The first type of engulfing pattern that we are going to discuss is the bullish engulfing pattern. Obviously, this pattern is a bullish reversal sign. Therefore, when it is spotted on the chart it means the bears are losing their grip over the market and they are giving way to bulls. So a bullish trend can be expected.
The way a bullish engulfing pattern is formed is when a smaller bearish candle is engulfed by a second, much larger, green candle. The first candle is red, naturally because there is already a downtrend in the market. However, it is small. This means the opening and closing prices are close to each other. Another signal that the push to sell might be coming to an end.
In any case, the candle is red, which means the closing price of the candle is still lower than the opening price. But the important part of the pattern is the second candlestick.
The big-bodied green candlestick is formed because, first, the opening price is lower than the closing price of the previous candle, and second, its closing price is much higher than the opening price of the first candle.
Therefore, it is both lower and higher than the previous candle. But the closing price is higher than the opening price, and so the candle is green.
In this way the second green candle engulfs the previous red candle – hence the bullish engulfing pattern.
How to Trade with the Bullish Engulfing Pattern?
So far, you might think to yourself that a double candle pattern such as the engulfing pattern is very easy to detect and use, right?
While that may be true, it cannot be that simple after all. Remember, there are also single candle patterns, which means they are only made from one candle. So it is not the shape that creates all the challenges.
There are other important factors. Most notably, the place of formation of where the candlestick pattern is detected on the chart.
In the case of the bullish engulfing pattern, it has to be detected when there is already a bearish trend or downtrend in the market. Otherwise it wouldn’t be a bullish engulfing.
Once you make sure of that, you can use the bullish engulfing as a strong sign that selling pressure in the market is coming to an end and that buyers might take over the market at any point.
What Is the Bearish Engulfing Pattern?
The opposite side of the bullish engulfing pattern is the bearish engulfing. Of course, with this pattern, instead of a large green candle engulfing a small red candle, we have a small green candle first which is then followed by a larger red candle.
Along similar lines, the first small green candle should be taken as the sign that although there is already an uptrend in the market, it is running out of fuel, and hence the green candle has a really small body.
Naturally, in order for it to be a bearish engulfing the second candlestick ought to be a large red candle. Therefore, the opening price of the second candle should be higher than the closing price of the first one, and its closing price needs to be lower than the opening price of the first green candle.
Remember, these details are important, because the second candle should be both lower than the first candle and also higher than it.
How to Trade with the Bearish Engulfing Pattern?
The bearish engulfing pattern is a bearish reversal sign. This means, it needs to be detected when there is already an uptrend in the market. Such patterns would normally form when an uptrend or a bullish trend is near its end.
As a forex trader, you can use this candlestick pattern as a signal that a bearish trend is in the making. So get ready for it.
The Benefits of Engulfing Candlestick Patterns
Although we have mentioned many times that the engulfing patterns, either bullish or bearish, are reversal patterns, there is another side to them.
Engulfing candlestick patterns can also be used as a strong sign of trend continuation. So, let’s look at both of these applications.
- Engulfing patterns for trend reversal: the main feature of these patterns is trend reversal. But in order for them to be trend reversal signs, they need to occur when there is the opposite trend in the market – i.e. a bullish engulfing during a downtrend and a bearish engulfing during an uptrend.
- Engulfing patterns for trend continuation: meanwhile, engulfing patterns can also be strong signs of trend continuation. But for this purpose, they need to occur during their own corresponding trend in the market – i.e. a bullish engulfing during an uptrend and a bearish engulfing during a downtrend.
Engulfing patterns are among the most important candlestick patterns. They have two types of bullish engulfing and bearish engulfing. In either case, this pattern is formed with two candlesticks, where one candle is engulfing (much bigger from top and bottom) from the other candle. Engulfing patterns are mainly a sign of trend reversal, but they can also be a trend continuation sign, depending on when and where they are identified.