Engulfing Bar Candlestick Pattern

The engulfing bar candlestick pattern is a significant pattern in the technical analysis used by traders to make predictions about future price movements in the financial markets. There are two primary types of engulfing bar patterns: the bearish engulfing bar and the bullish engulfing bar

Bearish Engulfing Bar Pattern

The bearish engulfing bar pattern consists of two candlesticks.

The first candle (smaller body) is typically bullish, meaning it closes higher than it opened. The second candle (larger body) is bearish and completely engulfs the first candle. This means that the high of the second candle is higher than the high of the first candle, and the low of the second candle is lower than the low of the first candle.

This pattern is considered a strong reversal signal, especially when it occurs at the end of an uptrend. It suggests that sellers have taken control of the market and may lead to a trend reversal from an uptrend to a downtrend.

Bearish engulfing bar example

You can observe that when this price action pattern occurs within an uptrend, it suggests the potential for a trend reversal. This occurs because buyers are losing their grip on the market, allowing sellers to exert pressure and potentially drive prices lower.

Bearish Engulfing Trading Strategy

Entering the Trade:
When you spot a bearish engulfing pattern, focus on the second candle in the pattern. Wait for this second candle to fully form, and then it’s time to make a move. Place a sell order just below the lowest point of that second candle. This way, you can take advantage of potential price drops.

Setting a Safety Net (Stop Loss):
Protecting your investment is essential. With the bearish engulfing pattern, it’s quite straightforward. Set your stop loss above the highest point in the pattern. Since the second candle shows both the highest and lowest points, your stop loss will be above the highest point of that second candle.

Aim for Profits:
There are various ways to decide on your profit target in forex trading. Some folks use risk and reward ratios, and some target support or resistance level

Bullish Engulfing Bar Pattern

The bullish engulfing bar pattern also consists of two candlesticks.

The first candle (smaller body) is typically bearish, meaning it closes lower than it opened. The second candle (larger body) is bullish and completely engulfs the first candle. This means that the high of the second candle is higher than the high of the first candle, and the low of the second candle is lower than the low of the first candle.

This pattern is considered a strong reversal or continuation signal, depending on its context.
When it forms an uptrend, it suggests that buyers have taken control of the market and may indicate a continuation of the uptrend.

Bullish Engulfing Bar Example

The example above shows us clearly how the market changes direction after the formation of a bullish engulfing bar pattern.
The smaller body that represents the selling power was covered by the
second body that represents the buying power.

However, when it forms at the end of a downtrend, it can signal a powerful trend reversal from a downtrend to an uptrend.

Trading Strategy for Bullish Engulfing Bar:

Entry:

Identify a bullish engulfing bar pattern in the context of an uptrend.
Enter a long (buy) trade at the opening of the candle following the bullish engulfing bar.

Stop Loss:

Place the stop-loss order just below the low of the engulfing candle. This level represents a potential reversal point.
Alternatively, you can set the stop-loss slightly below the low of the previous candle for added protection.

Take Profit:

Set the take-profit order at a reasonable target level based on your risk-reward ratio. You can consider using one of the following methods:
a. Measure the height of the engulfing candle and project it upward from the entry point. This represents a potential price target.
b. Identify key resistance levels, such as previous swing highs, and set your take-profit just before these levels.
c. Use a trailing stop to capture additional gains as the trade moves in your favor.

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