If there’s one candle pattern that represents an immediate shift in balance between buyers and sellers it is the engulfing candle.
Today we take a deep dive into some of the key nuances of this pattern and explain how context and confirmation are essential elements to making this pattern a useful tool in your trading toolkit.
Understanding the Engulfing Pattern
The Engulfing candle pattern occurs when a single candlestick completely engulfs the body of the previous candle. In a bullish engulfing, a large bullish candle fully covers the smaller previous bearish candle, while in a bearish engulfing, a large bearish candle engulfs the previous bullish one.
Within the space of a signal candle, the market has completely erased the previous candles price action and sometimes multiple prior candles price actions. This step change in momentum, is why it is often known as the ‘power shift pattern’ – when it is identified correctly can represent a key inflection point.
Bullish Engulfing: A bullish engulfing suggests that after a period of selling, buying pressure has taken over, overpowering the bears in one strong move. This may indicate a potential reversal, from a bearish trend to a bullish one.
Bearish Engulfing: A bearish engulfing indicates that after a period of buying, selling pressure has overwhelmed the bulls. This could signal a shift from an uptrend to a downtrend.
Example: Nvidia Daily Candle Chart
In this example, we see bullish and bearish engulfing candles form at the parameters of a range that formed on Nvidia’s daily candle chart.
Past performance is not a reliable indicator of future results
The Importance of Location and Context
Like any chart pattern, the Engulfing candle is most effective when it occurs in the right context. Its location is crucial to its reliability. Trading the pattern within a range or consolidation zone can be misleading, as there may not be a clear prevailing trend for the pattern to reverse.
For a bullish engulfing to be meaningful, it should ideally appear near a key support level, where buyers are likely to step in. In contrast, a bearish engulfing is more reliable when it appears near a key resistance level, where selling pressure may be about to take control.
In short, location is everything. An engulfing pattern at a support or resistance level holds more weight than one formed in the middle of a range or without a clear market direction.
Example: USD/CAD Daily Candle Chart
In this example, we see small bearish engulfing candles form within a consolidation range. These are not significant signals as the location and context is sub-optimal. We then see a large engulfing candle form at the parameter of resistance – creating a clear bearish signal.
Past performance is not a reliable indicator of future results
Confirmation: The Next Candle is Key
A major element to watch for with the Engulfing candle is confirmation. The next candle after the engulfing one should trade in the direction of the engulfing candle.
For a bullish engulfing, the next candle should ideally close above the high of the engulfing candle. This confirms that the buying momentum is likely to continue.
For a bearish engulfing, the next candle should ideally close below the low of the engulfing candle. This suggests that selling pressure is likely to persist.
Without this confirmation, the pattern can be less reliable, and the initial move may not hold. The following candle helps validate whether the momentum shift is real or just a short-term fluctuation.
Stop Placement
Stop placement is a crucial aspect of trading the Engulfing pattern. Stops should generally be positioned just beyond the high or low of the engulfing candle, depending on the direction of the trade.
For a bullish engulfing, place the stop below the low of the engulfing candle to allow for some movement without being stopped out prematurely.
For a bearish engulfing, place the stop above the high of the engulfing candle to protect against any potential reversal or false breakouts.
Placing stops in these locations helps manage risk while giving the trade enough room to develop, without exposing the position to unnecessary losses.
The Engulfing Pattern Across Timeframes
One of the advantages of the Engulfing candle is its versatility. It can be used effectively on any timeframe, from short-term intraday charts to long-term daily or weekly charts.
On shorter timeframes, the Engulfing pattern may act as a signal for intraday trades, indicating a quick shift in momentum.
On longer timeframes, the pattern could signal a larger, more sustained trend change, suggesting a longer-term move in the market.
Regardless of the timeframe, the Engulfing candle remains an important pattern because it highlights a significant change in market sentiment, whether on a micro or macro scale.
Final Thoughts
The Engulfing candle is an effective pattern for identifying a shift in market momentum, either from bullish to bearish or vice versa. However, its effectiveness is heavily influenced by location and confirmation. When the pattern forms at a key support or resistance level and is followed by confirmation from the next candle, it can offer valuable insight into where the market may be headed. By combining these elements with good stop placement, traders can better manage risk and increase the reliability of the signals this pattern provides.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Today we take a deep dive into some of the key nuances of this pattern and explain how context and confirmation are essential elements to making this pattern a useful tool in your trading toolkit.
Understanding the Engulfing Pattern
The Engulfing candle pattern occurs when a single candlestick completely engulfs the body of the previous candle. In a bullish engulfing, a large bullish candle fully covers the smaller previous bearish candle, while in a bearish engulfing, a large bearish candle engulfs the previous bullish one.
Within the space of a signal candle, the market has completely erased the previous candles price action and sometimes multiple prior candles price actions. This step change in momentum, is why it is often known as the ‘power shift pattern’ – when it is identified correctly can represent a key inflection point.
Bullish Engulfing: A bullish engulfing suggests that after a period of selling, buying pressure has taken over, overpowering the bears in one strong move. This may indicate a potential reversal, from a bearish trend to a bullish one.
Bearish Engulfing: A bearish engulfing indicates that after a period of buying, selling pressure has overwhelmed the bulls. This could signal a shift from an uptrend to a downtrend.
Example: Nvidia Daily Candle Chart
In this example, we see bullish and bearish engulfing candles form at the parameters of a range that formed on Nvidia’s daily candle chart.
Past performance is not a reliable indicator of future results
The Importance of Location and Context
Like any chart pattern, the Engulfing candle is most effective when it occurs in the right context. Its location is crucial to its reliability. Trading the pattern within a range or consolidation zone can be misleading, as there may not be a clear prevailing trend for the pattern to reverse.
For a bullish engulfing to be meaningful, it should ideally appear near a key support level, where buyers are likely to step in. In contrast, a bearish engulfing is more reliable when it appears near a key resistance level, where selling pressure may be about to take control.
In short, location is everything. An engulfing pattern at a support or resistance level holds more weight than one formed in the middle of a range or without a clear market direction.
Example: USD/CAD Daily Candle Chart
In this example, we see small bearish engulfing candles form within a consolidation range. These are not significant signals as the location and context is sub-optimal. We then see a large engulfing candle form at the parameter of resistance – creating a clear bearish signal.
Past performance is not a reliable indicator of future results
Confirmation: The Next Candle is Key
A major element to watch for with the Engulfing candle is confirmation. The next candle after the engulfing one should trade in the direction of the engulfing candle.
For a bullish engulfing, the next candle should ideally close above the high of the engulfing candle. This confirms that the buying momentum is likely to continue.
For a bearish engulfing, the next candle should ideally close below the low of the engulfing candle. This suggests that selling pressure is likely to persist.
Without this confirmation, the pattern can be less reliable, and the initial move may not hold. The following candle helps validate whether the momentum shift is real or just a short-term fluctuation.
Stop Placement
Stop placement is a crucial aspect of trading the Engulfing pattern. Stops should generally be positioned just beyond the high or low of the engulfing candle, depending on the direction of the trade.
For a bullish engulfing, place the stop below the low of the engulfing candle to allow for some movement without being stopped out prematurely.
For a bearish engulfing, place the stop above the high of the engulfing candle to protect against any potential reversal or false breakouts.
Placing stops in these locations helps manage risk while giving the trade enough room to develop, without exposing the position to unnecessary losses.
The Engulfing Pattern Across Timeframes
One of the advantages of the Engulfing candle is its versatility. It can be used effectively on any timeframe, from short-term intraday charts to long-term daily or weekly charts.
On shorter timeframes, the Engulfing pattern may act as a signal for intraday trades, indicating a quick shift in momentum.
On longer timeframes, the pattern could signal a larger, more sustained trend change, suggesting a longer-term move in the market.
Regardless of the timeframe, the Engulfing candle remains an important pattern because it highlights a significant change in market sentiment, whether on a micro or macro scale.
Final Thoughts
The Engulfing candle is an effective pattern for identifying a shift in market momentum, either from bullish to bearish or vice versa. However, its effectiveness is heavily influenced by location and confirmation. When the pattern forms at a key support or resistance level and is followed by confirmation from the next candle, it can offer valuable insight into where the market may be headed. By combining these elements with good stop placement, traders can better manage risk and increase the reliability of the signals this pattern provides.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.