Engulfing Pattern is the second of the most lucrative and best signal candle formation

The Engulfing pattern is a reversal pattern consisting of two candles. That is, it occurs at the bottom of the rising or falling trend. The body colors are opposite, if it occurs in a downtrend, the first candle is red (bearish), the second candle is green (bullish). It is the opposite if it occurs in an uptrend.

Engulfing Pattern

You can also read this article for information about other candlestick patterns. All Candlestick Chart Patterns in the Stock And Crypto Market

What is Bullish Engulfing Pattern?

A bullish engulfing pattern is a candlestick pattern that occurs when a small black candlestick the next day is followed by a large white candlestick whose body completely overlaps or engulfs the body of the previous day’s candlestick.

Bullish engulfing patterns are more likely to signal reversals when they precede four or more black candlesticks.

Traders should look not only at the two candlesticks that formed the bullish engulfing pattern, but also at the previous candlesticks.

The Bullish Engulfing pattern is a pattern that ends a downtrend and indicates the possibility of an uptrend. I will give two examples of this below.

Bullish Engulfing Pattern

The candle left by the index (the first candle in the rectangle) on June 18, a normal bearish candle, continued directly down from the point it opened without making any upwards, picked up a little from where it landed, left a shadow and closed a little above the bottom.

On the other hand, the candle on June 19 (the second candle inside the rectangle) was opened with a gap (gap) lower than the previous day’s close. This gaping opening is normally a signal that the downtrend will continue because the sellers are very eager. See picture below:

Bullish Engulfing Pattern

However, although the June 19 candlestick fell a little lower from where it was opened, it closes the day at 94,436, even higher than the opening of the previous candle, thanks to the intense pressure from the buyers in that region. It completely covers and swallows the candle before it. Here is the key point.

Engulfing literally means “to contain, to swallow”. So the next candle has swallowed the entire body of the previous candle, including the shadows. In other words, the buyers are so eager that they closed the gap, they dragged the paper up and closed it above the previous candle.

Now let’s take a look at the hourly chart of these two candles. So you can better understand the logic. The candles in the left rectangle are for June 18, and those on the right are for June 19. As you can see, it was a top-down seller day on June 18th. Note where it closes.

Bullish Engulfing Pattern

On June 19th, the GAPLI is the day that has been opened from below somehow. While the close of June 18 was around 93,000, the opening of June 19 was 92,597. Then he saw a little down and climbed up all day and closed the day at 94,436. It both closed the gap and closed above the previous candle.

It was a good example of the Engulfing Bull formation formed at the end of the downtrend. Now I will give another example to reinforce it a bit.

Bullish Engulfing Pattern

If you noticed, the green candle this time has a strong, long body with a lot of acceleration. He swallowed the candle of the previous 7 days and covered it. Examine the previous candles well, all but one are weak, unstable, small-bodied candles. There are plenty of #dojis too. So paper is struggling at these levels. The green-bodied long candle that follows is an indication that the return will be very hard, accelerated and eager. The more candles the second candle swallows, the better for us. As you can see, the stock has been on the rise since then.

What Does the Bullish Engulfing Pattern Tell You?

A bullish engulfing pattern should not be interpreted as a simple white candlestick representing upward price action followed by a black candlestick representing downward price action. For an uptrend pattern to form, the stock must open on Day 2 lower than it closed on Day 1. If the price did not gap down, there would be no chance of engulfing the body of the white candlestick. of the previous day’s black candlestick.

Because both stocks open lower on day 1 and close higher than they open on day 1, they represent a day when a white candle in a bullish engulfing pattern has the bears control the price of the morning stock only to have a bullish take over at the end of the stable day.

The white candlestick of an ascending engulfing pattern typically has a small upper wick, if any. This means that the stock closed at or near the high, which means the day is over while the price is still rising.

The lack of this upper wick makes it more likely to produce another white candlestick the next day that will close higher than the closed bullish pattern, but it is also possible the next day to produce a black candlestick after gapping at the open. Analysts pay special attention to these as bullish and engulfing patterns tend to indicate trend reversal.

What is Bearish Engulfing Pattern?

A bearish engulfing pattern can occur anywhere, but is more important if a price is formed after an upfront. This could be an uptrend or a reversal in the opposite direction with a larger downtrend.

Ideally, both candles are of significant size relative to the price bars around them. Two very small bars can create an engulfing pattern, but it matters much less than if both candles are large.

The actual body of the candlesticks – the difference between the opening and closing price – is what matters. The true body of the down candle must swallow the up candle.

The Bearish Engulfing pattern is much less important in volatile markets.

Engulfing Pattern

Yes, these are the outlines of the formation. So how can trading strategies be created with this formation? Those who want to act aggressively can trade as soon as they see the formation, those who want to be a little more cautious wait for a small pullback and then trade. It all depends on your risk perception.

However, when trading, remember that an engulfing pattern may signal a change in the direction of the trend, but if there is a major trend in the paper, this reversal may also remain as a correction. The stock, which entered the correction after the Engulfing formation, can continue on its way after the correction is over.

Also, there must be a trend (up or down) in the history of the Engulfing pattern. Engulfing in consolidation without a trend is not taken into account. The smaller the first candle, the larger the second candle, the better.

Another most frequently asked question is “where are the shadows in this?” The answer is this. The body of the second candle (body only) must swallow the whole of the first candle (body + shadow). This is the ideal formation. However, if only the body of the first candle is swallowed, the formation will not be cancelled. I explained mixed, check the examples:

Engulfing Pattern

What Does the Bearish Engulfing Pattern Tell You?

A downtrend is seen at the end of some upward price action. It is marked by the first candle of upward momentum, which is overtaken or engulfed by a larger second candle that indicates a shift towards lower prices. The model has more credibility when the opening price of the engulfing candle is well above the close of the first candle and the close of the engulfing candle is well below the opening of the first candle. A much larger down candle will show more strength than if the down candle is only slightly larger than the up candle.

The pattern is also more reliable when it follows a higher clean movement. If the price action is volatile or volatile, many engulfing patterns will emerge, but because the overall price trend is volatile or volatile, it is unlikely to lead to large price movements.

Before acting on the pattern, traders usually wait for the second candle to close and then trade on the next candle. Actions include selling a long position or potentially entering a short position when a downtrend occurs.

If a new short position is entered, a stop loss can be placed above the height of the two-bar pattern.

Intelligent traders take the overall picture into account when using engulfing bearish patterns. For example, it may not be wise to trade short if the uptrend is very strong. Even the formation of a formation that swallows the fall may not be enough to stop progress for a long time. Still, if the overall trend is down and the price has seen a pullback to the upside, the downtrend could provide a good shorting opportunity as the trade aligns with the long-term downtrend.

What does Bullish and Bearish Engulfing Patterns tell you?

Trend continuation

Engulfing patterns support the continuation of the ongoing trend (uptrend supports downtrend); For example, when a bullish coin or stock market is detected in an uptrend, it indicates that the ongoing trend will continue.

Reversals

Bullish and Bearish Engulfing patterns may indicate a trend reversal.

When a bullish engulfing pattern is found at the bottom of the downtrend, it indicates that the uptrend is over and reversing.

Similarly, when a downtrend formation is found at the top of an uptrend, it signals the end of the downtrend and reversal.

Exit strategy

The Bullish and Bearish Engulfing pattern can also be used as a signal to exit if the trader has a buy or sell position in the ending trend or the ongoing trend.

Engulfing Pattern Rules;

Can I just decide to buy or sell signal with engulfs?

No. If the volume increases with the price, if the aggressive movements continue, it becomes easier to make a decision.

How do we decide on an uptrend?

Combined with the current trend, engulf can be a strong signal, but it doesn’t mean it won’t change direction.

How do we decide on the strongest buy signal?

The most important thing for me is related to which formation the engulf formation is formed in. For example, if I see an engulf at the bottom of the last shoulder of a tobo formation, I would say that it’s time for the tail of the calf to break off. Or, if an ascending triangle breaks the triangle by creating an engulf with high volume, I mean I caught the buy signal.

Engulfing Pattern Trading Example

Engulfing Pattern Example
Engulfing Pattern Example
Engulfing Pattern Example

Difference between Bullish and Bearish Engulfing Patterns

A summary of the main differences between bullish and bearish forms is as follows. 

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