An Engulfing or Engulfing Candlestick Pattern is a technical chart pattern that indicates a possible reversal of the current market trend. These patterns are crucial in price-action analysis. They allow traders to enter the market and anticipate the direction of the market's movement. A candlestick chart graphically shows the movement of assets' prices using an engulfing pattern.
Two candles are used to create an engulfing pattern. The first candle is "engulfed" and the second candle is "engulfed". To create an engulfing pattern that is valid, you must ensure that the first candle fits perfectly within the body of each candle. The appearance of an engulfing candlestick on the chart when the price is rising suggests that there might be a top. However, if the pattern is visible when the price drops, it could indicate that there is a bottom.
Based on the location of the engulfing candles in relation to current market trends, there are two types: Bullish and Bearish.
A bullish engulfing is a pattern that consists of two candles. The second candle completely engulfs the first, regardless of how long the tail shadows are. A bullish engulfing candles also indicate an increase in buying pressure when they appear in a downtrend. Bullish engulfing patterns indicate more buyers entering the market and driving up the price. This can often cause a reverse of market trends.
Traders usually enter long positions when prices open lower than their previous lows and move higher than the highs of the second candle. This confirms that the downtrend has reversed.
A bearish engulfing is the opposite to a bullish pattern and gives the best signal when it appears in an uptrend. This pattern indicates a decrease in buying pressure and an increase in selling pressure. This pattern consists of two candles. An up candlestick is engulfed in a large down candlestick. A bearish engulfing design indicates that more sellers are entering the market, driving down prices. It often causes a reversal in the market trend.
The image above shows that the candle being "engulfed" is bullish and the engulfing one is bearish. The bearish engulfing patterns indicate that the selling pressure will prevail over the buying pressure. With the market closing below the opening of the previous day, this pattern predicts a market trend reversal.
A bullish engulfing is opposite of a bearish one. A bullish engulfing design has the first candle as a down candle. The second candle is an up candle with its larger body engulfing it. A bearish engulfing signal is where the first candle in a two-candle arrangement is an up candle. The second candle, which is a larger down candle with its actual body engulfing it, is a bigger one.
Importance Engulfing Designs
Engulfing patterns allow traders to predict trend reversals and provide them with an indication of the trend continuing or an exit strategy.
Trend Reversal Traders can predict a trend reversal and help them to get into the market as quickly as possible.
Market Trend Continuation Traders may also use the Engulfing Candle Pattern to forecast the continuation of the current trend. To spot a bullish/bearish pattern in an uptrend, or downtrend, traders can use the "engulfing" candlestick pattern to predict the continuation of that trend.
Exit plan: A trader who holds a position in an existing trend can use the engulfing to signal that the trend is ending.
Although engulfing candlestick pattern can be a powerful tool to indicate a trend reversal and are very accurate, they don't have to always be correct. Engulfing patterns can be used as an analytical tool to detect a shift in momentum. If the price action is chaotic, regardless of whether it is increasing or decreasing in price, the importance to engulfing patterns decreases as price movements are considered a common signal.
Also, engulfing candlestick patterns do not offer price targets. Therefore traders will need to rely on other indicators that help them determine when to exit a profitable trading trade.