The engulfing candlestick pattern is a dual candle reversal candlestick pattern. There are two types of engulfing candlestick patterns; the bearish engulfing candlestick pattern, and the bullish engulfing candlestick pattern. In both patterns, the second candle – which moves in the opposite direction as the first candle- completely covers (engulfs) the first candle. In simple terms, the bullish engulfing candlestick pattern has a green candle (the bullish engulfing candle) engulfing a red candle, and the bearish engulfing candlestick pattern has a red candle (the bearish engulfing candle) engulfing the green candle.
What are the odds that the engulfing candlestick pattern will work in your favor?
Research shows that the engulfing pattern confirms reversal 67.3% of the time. Of the 4120 markets that were analyzed, the engulfing pattern confirmed reversal within 2.9 candles or got invalidated within 5.9 candles. Confirmed reversal reached the risk-to-reward ratio of 2:1 36.8% of the time and it retested the entry price level 97.1% of the time. The expected outcome without accounting for service fees is 0.104$/$ which means that for every $100 you risk on a trade using the engulfing candlestick pattern you get $10.4 on average.
Handling risk with the engulfing candlestick pattern
Using a trading strategy that is solely based on the engulfing candlestick pattern is highly unadvisable. For this reason, it is important to use proper risk management. It is also important to take a keen look at the chart and be on the lookout for other indicators such as the size of the candle, the area of value, the length of the downtrend or uptrend, etc.
How to trade when you see the engulfing candlestick pattern
Isolate the trend: note the direction of the strongest trend. A p-trend is indicated by higher-swinging highs and higher-swinging lows in price, and a down-trend is indicated by lower-swinging lows and lower-swinging highs in price.
Watch for pullback: once you have established the strongest trend, you need to wait for a pullback. Always refrain from opening a position if there is no noticeable trend, or if the trend is not clear.
Enter the trade after the engulfing candlestick pattern: with an apparent trend and a noticeable pullback, it is safe to open a position. Initiate your trade and remember to put a stop loss above the current high for short positions and below the current low for low positions.
How to exit the trade: if you notice that the trend is trying to reverse, then it is time to exit your trade. You may also need to exit the trade if you notice that the market is moving in the opposite direction of what you hoped for.
The engulfing candlestick pattern, like other patterns, requires traders to find other indicators before opening a position. This ensures that they assess the risk and have clear entry and exit points. The key to ensuring that your trades are profitable is ensuring that you study the charts history and identify patterns that can help you predict the future of the market.