Engulfing the Market: How to Trade Bullish and Bearish Engulfing Patterns

Engulfing patterns are considered one of the most important candlestick formations in technical analysis. They can signal potential trend reversals and are considered reliable patterns for traders. An engulfing pattern occurs when the body of a candlestick completely covers the body of the previous candlestick. In this article, we will be discussing how to trade bullish and bearish engulfing patterns in the forex market.

Bullish Engulfing Pattern

A bullish engulfing pattern is formed when a small bearish candle is followed by a larger bullish candle that totally engulfs the previous candle, including its shadows. This pattern indicates that the buying pressure has overcome the selling pressure, and a potential uptrend may be in the making.

Identifying a Bullish Engulfing pattern

To identify this pattern, look for the below:

1. The first candle should have a small real body and long wicks or shadows.
2. The second candle should open lower than the close of the previous candle and close higher than the open of the previous candle.
3. The body of the second candle should completely engulf the body of the first.

Trading the Bullish Engulfing pattern

Traders can use the bullish engulfing pattern to buy the security or pair. Here is a step-by-step guide on how to trade bullish engulfing patterns:

1. Wait for the bullish engulfing pattern to form.
2. Buy the pair/security at the open of the third candle (the second bullish candle).
3. Place a stop-loss below the low of the first candle (the bearish candle).
4. The profit target is set at a minimum of two times the stop-loss distance.

Bearish Engulfing Pattern

The bearish engulfing pattern is the opposite of the bullish engulfing pattern. It forms when a small bullish candle is followed by a larger bearish candle that completely engulfs the body of the previous candle. This pattern indicates that selling pressure has overcome buying pressure, and a potential downtrend may be in the making.

Identifying a Bearish Engulfing pattern

To identify this pattern, look for the below:

1. The first candle should have a small real body and long wicks or shadows.
2. The second candle should open higher than the close of the previous candle and close lower than the open of the previous candle.
3. The body of the second candle should completely engulf the body of the first.

Trading the Bearish Engulfing pattern

Traders can use the bearish engulfing pattern to sell the security or pair. Here is a step-by-step guide on how to trade bearish engulfing patterns:

1. Wait for the bearish engulfing pattern to form.
2. Sell the pair/security at the open of the third candle (the second bearish candle).
3. Place a stop-loss above the high of the first candle (the bullish candle).
4. The profit target is set at a minimum of two times the stop-loss distance.

Trading Strategies Using Engulfing patterns

1. A single engulfing pattern provides a good entry signal; however, traders should also look for confirmation. They should look for other technical analysis tools to confirm the trade setup, including support and resistance levels, trend lines, or other price action signals.
2. Traders can use multiple time frames to identify engulfing patterns. When the same pattern appears on different time frames, there is increased confirmation, and traders can enter the market with more confidence.
3. An engulfing pattern in the context of a larger trend may provide a more reliable signal. Traders can use trend lines, moving averages or other technical indicators to confirm the trend direction, and only take trades in the direction of the trend.

Conclusion

Engulfing patterns are powerful tools used by traders to signal potential trend reversals. The bullish and bearish engulfing patterns are easy to identify, and when used with other technical analysis tools, can lead to profitable trades. It is essential to wait for the pattern to be confirmed before trading and to use proper risk management techniques such as stop-loss and profit targets. Traders should practice and test their trading strategies before trading on live accounts. By mastering engulfing patterns, traders can increase their success rates and profits in the forex market.