Engulfing candles are one of the most powerful candlestick patterns used in technical analysis. This comprehensive guide will teach you everything you need to know about trading engulfing candles, from what they are to strategies for profiting from them.
What is an Engulfing Candle?
An engulfing candle is a two candle reversal pattern that signals a potential change in the direction of the trend. It is formed when the body of the current candle fully engulfs or “covers” the body of the previous candle.
There are two types of engulfing patterns:
- Bullish Engulfing – Formed when a small red candle is followed by a large green candle that engulfs it. This indicates the bears are losing control and the bulls are taking over.
- Bearish Engulfing – Formed when a small green candle is followed by a large red candle that engulfs it. This suggests the bulls are losing steam and the bears are gaining control.
Key Details of an Engulfing Candle
For a valid engulfing candle, there are a few key requirements:
- The body of the second candle must fully engulf the body of the first candle. The shadows/wicks are less important.
- The first candle must be a smaller, opposite colored candle relative to the second engulfing candle.
- The overall price movement matters more than the candle colors. For example, a green candle engulfing a smaller red candle is bullish, even if the green candle closes lower than it opened.
- Engulfing candles work on all time frames, from the 1 minute chart up to the weekly chart. Larger time frames tend to produce more significant reversals.
- Volume should expand on the second engulfing candle for confirmation. High volume adds more weight to the pattern.
How to Trade Engulfing Candles: Strategies and Tips
Now that you understand the anatomy of an engulfing candle, let’s discuss how to actually trade these patterns…
Confirmation is Critical
Before taking any trade based on an engulfing candle, it’s essential to wait for confirmation that the reversal is valid. Some strategies for confirmation include:
- Look for a breakout – If the engulfing candle breaks above/below the high/low of the previous candle, it indicates the reversal has begun.
- Wait for next candle close – Ensure the next candle after the pattern closes in the direction of the expected move.
- Volume confirmation – Higher than average volume adds weight to the engulfing pattern.
- Support/resistance – The reversal is stronger if engulfing candle tests key support/resistance levels.
- Other indicators – Confirm with indicators like MACD, RSI, moving averages to validate reversal.
Position Sizing and Risk Management
When trading engulfing candles:
- Use smaller position sizes for initial entry, then add to position on confirmation
- Place stop loss below engulfing candle lows for longs, or above candle highs for shorts
- Move stop to breakeven once pattern is validated, then trail stop to lock in profits
- Target at least 2:1 risk reward ratio
Engulfing Candle Trading Strategies
There are many effective strategies to trade engulfing candles. Some examples:
Engulfing + Moving Average Crossover
- Go long when bullish engulfing candle crosses above 20/50 EMA
- Enter short when bearish engulfing crosses below 20/50 EMA
Engulfing + Previous Resistance/Support
- Buy engulfing candle pullback to broken resistance turned support
- Short engulfing candle rally into previous support turned resistance
Engulfing + Chart Patterns
- Trade engulfing candle breaks from triangles, flags, wedges, channels
- Combine with candlestick patterns like tweezer tops/bottoms
Engulfing + Harmonic Patterns
- Use engulfing candle as entry trigger for ABCD, bat, crab, cypher, and other harmonic patterns
Engulfing + Momentum
- Engulfing candle acting as reversal in overbought/oversold market on RSI or similar indicator
The key is combining engulfing candles with other confluence factors to validate high probability setups.
Engulfing Candle FAQ
Below are answers to some frequently asked questions about trading engulfing candle patterns:
What time frame is best for trading engulfing candles?
Engulfing candles are effective on all time frames. Lower time frames like 5 or 15 minute will provide more opportunities but higher time frames like 1 hour or 4 hour create more significant reversals.
What’s the best way to confirm an engulfing pattern is valid?
Wait for a breakout above/below the engulfing candle, observe the next candle’s close, check for higher than average volume, and use other indicators like moving averages to confirm the reversal.
Should I trade every engulfing candle pattern?
No, only trade engulfing candles that occur at key support/resistance levels or after prolonged trends when price is over-extended. Not all engulfing candles produce profitable trades.
Can engulfing candles be combined with other strategies?
Absolutely. Engulfing candles become much higher probability setups when combined with chart patterns, indicators, moving averages, Fibonacci retracements, and other confluence factors.
Do engulfing candles work for forex, crypto, stocks, and other markets?
Yes. Engulfing candles can be applied to all liquid markets. The principles remain the same regardless of the instrument being traded.
How do I manage risk when trading engulfing candles?
Use smaller position sizes for initial entry, place stop loss beyond pattern high/low, target at least 2:1 risk reward, and move stop to breakeven once trade is validated.
Conclusion
Engulfing candles are powerful price action patterns that signal potential trend reversals. By mastering the strategies above, you can confidently trade engulfing candles on your preferred time frame and market. Remember to exercise patience, wait for confirmation, and manage risk – then engulfing candles can transform into a valuable component of your overall trading plan.
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