A trader only needs one candlestick to spot a trading opportunity in a single candlestick pattern. To identify a trading opportunity, however, a trader must analyze multiple candlestick patterns. The trading opportunity develops over at least 2 trading sessions.
The engulfing is the first pattern of multiple candlesticks that we should be looking into. To evolve, the engulfing patterns requires two trading sessions. A typical engulfing candle pattern will have a short candle on day 1, and a longer candle on the second day. This makes it appear as if it is swallowing the candle on day 1. The "Bullish Engulfing” pattern is the one that appears at the bottom end of the trend. The "Bearish Engulfing” pattern is used if the engulfing patterns appears at the top of the trend.
Two candlestick patterns that appear at the bottom end of a downtrend are the bullish engulfing and bearish engulfing patterns. This pattern is bullish and prompts traders to take a long position. Below is the chart that shows the two-day bullish, engulfing pattern. These are the prerequisites to this pattern:
This is the trade setup for the bullish-engulfing pattern.
You will need to wait until either the target is reached or the stoploss is breached before you can initiate a trade. To lock in profits, you can always follow the stop loss.
Take a look below at DLF's chart; the bullish-engulfing pattern can be seen.
The OHLCP1- Open = 163, Low = 168, High = 168, Low= 158.5, Close = 160 OnP2The OHLC details include: Open = 159.5; High = 170.2; Low = 159; Close = 169.
This is the trade setup for the bullish-engulfing pattern.
Both the risk-averse as well as the risk-taker in this case would have been financially successful.
This is an example showing a bullish engulfing structure formed on Cipla Ltd. A risk-averse trader would have totally missed a great trading opportunity.
It is not always clear whether the candle should be able to engulf the entire candle or just the body. According to my experience, as long as the actual bodies are engulfed, I would consider the candle a bullish-engulfing pattern. Candlestick skeptics might object, but it really doesn't matter how much you trade with a particular pattern.
So, based on that thought, I would be happy to classify this pattern as a bullish-engulfing pattern even though the shadows have not been engulfed.
Two candlestick patterns that appear at the top of a trend are called the bearish engulfing.One must think about it from a shorter perspective as the bullish engulfing pattern is very similar.
This would be the trade setup:
P1: Close - 218.75
P2: Close - 209.4
Based on the bearish-engulfing pattern, the trade setup for the short trade is as follows.
In this case, both the risk-averse as well as the risk-taker would have made a profit.
Here's a fascinating chart. Based on my personal experience, Two candlestick patterns that appear at the top of a trend are called the bearish engulfing.One must think about it from a shorter perspective as the bullish engulfing pattern is very similar.
charts such as the one below can be very profitable. These trading opportunities should not be missed
Take a look at this chart. What are the highlights?
Let's take a look at this chart, event by event.
Based on my personal trading experience, I can confirm that a doji following a recognized candlestick pattern opens up more opportunities. This is why I want to highlight chart analysis methodology. In this chart, we didn't just focus on what was happening at P1 and P2. We went further than that to create a complete market view by combining two distinct patterns.
With a slight variation, the piercing pattern looks very similar to the bullish-engulfing one.P2's blue candle will completely engulf the red candles of P1. In a piercing pattern, however, P2's blue candles partially engulf P1's red candle. Engulfing should not exceed 50%. This can be verified visually or calculated. If P1's range (Open Close) is 12, then P2's should be at minimum 6 or higher, but not below 12.
This condition must be met in order to continue with bullish engulfing. The trade setup can only be initiated if the condition is met. The trade would be initiated by a risk-taker at the close. Risk-averse traders would only initiate trades the day after P2 close, after ensuring that a blue candle has formed. The low point of the pattern would be the stoploss.
With a slight variation, the dark cloud cover looks very similar to the bearish-engulfing pattern. The red candle on P2 is able to engulf P1's blue candles in a bearish-engulfing arrangement. In a dark cloud, however, the red candle of P2 can engulf 50 to 100% P1's blue candles. The trade setup is identical to the bearish engulfing patterns. The dark cloud cover is the opposite of a piercing pattern.
Stocks in the same sector tend to have similar price movements. Think about TCS and Infosys, ICICI Bank or HDFC Bank. Because they have similar businesses and sizes, their price movements are similar. This does not necessarily mean that their stock prices will move in the same direction. Bank stocks will fall if there are negative news stories in the banking sector. If the stock price at ICICI Bank drops by 2%, then it's not necessary that HDFC Bank's stock prices also drop exactly 2%. The stock price of HDFC Bank may drop by 1.5% to 2.5%. The two stocks could form two different, but somewhat similar candlestick patterns. For example, a bearish-engulfing pattern and dark cloud cover.
These are both easily identifiable candlestick patterns. However, I chose one of the two to start a trade. I'd rather bet on the bearish-engulfing pattern than a dark cloud covering. Because it engulfs every candle from the previous day, the bearishness of a bearish-engulfing pattern can be more prominent. A bullish engulfing or piercing pattern would be my preference.
There is however an exception to the selection criteria. In the next module, I will present a 6-point trading checklist. To be qualified, a trade must satisfy at least 3-4 points of this checklist. This is a good example of how to put this in perspective. Let's say that the ICICI Bank stock forms a piercing structure and the HDFC Bank Stock forms a bullish engulfing shape. The bullish engulfing pattern would naturally be tempting to trade. However, if the HDFC Bank stock meets 3 checklist points and the ICICI Bank Stock meets 4 checklist points, then I would still recommend ICICI Bank stocks, even though it forms a less compelling candlestick pattern.
If both stocks meet the 4 criteria, I will trade the HDFC Bank.