The Engulfing Patterns
The Hammer and Hanging man are individual candle lines. as previously seen, single candle lines through the color, length, and size of the real bodies and the shadows can send important signals about the market’s health. Most candle signals, however, are based on combinations of individual candle lines. the engulfing pattern is the first of these multiple candle line patterns. the Engulfing Pattern is a major reversal signal with two opposite color real bodies composing this pattern.
There are Three Criteria for an Engulfing Pattern:
- The market has to be in a clearly definable uptrend or downtrend even if the trend is short term.
- Two Candles comprise the engulfing pattern. The second real body must engulf the prior real body.
- the second real body of the engulfing pattern should be the opposite color of the first real body.
Engulfing pattern could be an important turning signal are :
- if the first day of the engulfing pattern has a very small real body and the second day has a very long real body. the small first real body candle reflects a dissipation of the prior trend’s force and the large second real body proves an increase in force behind the new move.
- if the engulfing pattern appears after a protracted or very fast move. A fast or extended move creates an overextended market and makes it vulnerable to profit taking.
- If there is heavy volume on the second real body of the engulfing pattern. volume will be discussed in part 2.
The Bullish Engulfing Pattern
A bullish engulfing pattern is a pattern with two candlesticks appearing at the end of a downtrend. As the name suggests, this is a climbing model that encourages the trader to go a long way. The prerequisites for the model are as follows:
- The prior trend should be a downtrend
- The first day of the C1 pattern should be a red candle reconfirming the bearishness in the market
- The candle on the 2nd day of the C2 pattern should be green, long enough to engulf the red candle
The bearish engulfing pattern
The bearish engulfing pattern is a two candlestick pattern that appears at the top end of the trend, making it a bearish pattern. The thought process remains very similar to the bullish engulfing pattern, except one has to think about it from a shorting perspective.
Take a look at the chart below, the two candles that make up the bearish engulfing pattern is encircled. You will see in this figure :
The bearish engulfing pattern as resistance and support is especially useful if the market has moved too far from he lows or highs to be comfortable selling or buying.