Charting the Markets: Engulfing

If you wish to step up your trading game and begin using reverse candlestick patterns to make better trades, you’ve come to the right place. In our last article, we discussed the Harami patterns — why they occur, how a trader can spot them, and what market trends they precede. But, to understand reverse candle stick patterns, it is also important to understand candlestick charts in general: 

Candlestick charts offer detailed information about price movements within a particular time frame, including the opening, closing, high, and low prices. Each "candlestick" consists of a body (the range between the open and close) and wicks (shadows) that extend to high and low prices. Green (or white) candles indicate prices closed higher than they opened, while red (or black) candles show prices closed lower than they opened.

In this article, we will be introducing an additional member of reverse candlestick patterns – the Engulfing pattern.

Engulfing

Similarly to the Harami pattern, the engulfing pattern also consists of two candlestick bodies. Moreover, it is the reversal of the Harami pattern. In other words, we can recognize an engulfing pattern in places where the first candlestick has a smaller body than the second one. Likewise, in this pattern, the second candlestick typically opens lower or higher than the closing of the first one (depending on the current market trend). Here’s what to look for to distinguish between the Harami and Engulfing patterns: 

1. Bullish Engulfing 

Occurs when the second (bullish) candlestick is significantly larger than the first (bearish) candle. The second candlestick might open at a lower position, but this is not necessary. This pattern signifies a trend shift from bearish to bullish. Generally, the bigger the gap, the bigger the trend shift. Lastly, the bigger the second candle, the higher the chance of a trend shift.

2. Bearish Engulfing

Occurs when the second (bearish) candlestick is significantly larger than the first (bullish) candle. The second candlestick might open at a lower position, but this is not necessary. This pattern signifies a trend shift from bullish to bearish. Generally, the bigger the gap, the bigger the trend shift. Lastly, the bigger the second candle, the higher the chance of a trend shift.

Here is an actual example of both Engulfing patterns occurring in a realistic situation:

Hopefully, this article will help you recognize and work with the Engulfing candlestick pattern. Keep your eyes peeled for our next article, where we will discuss more useful candlestick patterns you’re likely to encounter on your trading journey.