EURUSD Day Trading With Engulfing Candles

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High Probability Forex Engulfing Candle Trading Strategy

The engulfing candle trading strategy allows us to enter a trend at an opportune time. Using the trend, and the engulfing candle as a trade trigger, provides a powerful combination.

Candlestick charts have become a staple for most traders, and nearly every trading platform offers this highly visual chart style. Whether it is better than other chart forms I leave up to you. I personally like to use them. It isn’t necessary to use candlesticks to trade the strategy, OHLC charts also work.

I use this strategy for day trading, although it can be applied to other time frames as well, such as daily or weekly charts. Forex examples are used below, but I also use this entry technique in stocks and futures as well.

Forex Engulfing Candles

There are two types of engulfing candles, a bullish engulfing candle and a bearish engulfing candle.

For the purposes of this strategy, a bullish engulfing candle occurs when the “fat” part of an Up candle completely envelops a prior Down candle. The fat part of the candle marks the distance between the open and close of that bar, while the “wicks” mark the high and low. While there is no specific size requirement, typically both bars in the pattern should be substantial, with the up bar showing a strong short-term shift in momentum.

Figure 1 shows an example of a bullish engulfing pattern in the AUDUSD.

On my charts, up candles are green because the close was higher than the open. Down candles are red because the close of the candle was lower than the open of the candle.

Figure 1. Bullish Engulfing Pattern: AUDUSD 1-Hour Chart

Charts courtesy of my broker: FXopen

A bearish engulfing candle occurs when the “fat” part of a Down candle completely envelopes a prior Up candle. Figure 2 shows an example of a bearish engulfing pattern in the EURUSD.

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Figure 2. Bearish Engulfing Pattern: EURUSD 5-Minute Chart

Engulfing candles occur quite often, which is why we need additional criteria to trade them. I opt to use the trend and enter during a pullback.

Forex Engulfing Candle Trading Strategy

An engulfing candle occurs often. While its appearance signifies a sharp short-term change in direction, many of these patterns aren’t of concern or interest. In a trend, there are impulse waves and corrective waves. Ideally, we want to enter trades during corrective waves/pullbacks, assuming that the trend will continue and the next impulse wave in the trending direction will give us a nice profit.

The engulfing candle provides us a signal that a pullback is over, and the trend is about to resume. In the case of an uptrend, the bullish engulfing pattern signals that the selling which occurs on a pullback is over, and the buying is resuming. The trend doesn’t always resume right away, we may simply get a small push in the trending direction before the pullback resumes. Losing trades occur, and that is okay, as all losing trades can’t be avoided. Experienced traders can actively manage trades when this occurs, taking a small profit or small loss. Alternatively, simply let the price hit the stop or target (discussed shortly) and let the odds of the trade, and having a larger potential profit than risk, work in your favor.

Figure 3. Bullish Engulfing Candle Trading Strategy in Uptrend

For a bullish engulfing candle in an uptrend, the stop-loss is placed one pip below the low of the engulfing candle if trading on a one-minute chart. If using a longer time frame, like hourly, 4-hour, daily or weekly chart, then place the stop loss at least several pips below the low (the longer the chart time frame, the more space I give).

In the case of a downtrend, the bearish engulfing pattern signals the buying which occurs on a pullback is over, and the selling is resuming.

Figure 4. Bullish Engulfing Candle Trading Strategy in Downtrend

For a bearish engulfing candle in a downtrend, the stop-loss is placed just above the high of the engulfing candle.

Engulfing candles are simply an entry technique, and therefore don’t provide a profit target. Profit targets can be established using Fibonacci Extensions or a reward:risk ratio. Apply the Fibonacci extension tool to the impulse wave and the pullback to get an idea of where the price will go on the next impulse wave (see Fibonacci Extension article).

Alternatively, use a 1.6:1 or 2:1 reward to risk ratio if day trading. For example, if you risk is 10 pips, your profit target is 16 or 20 pips respectively.

If swing trading, Setting Targets to Maximize Gains shows how to place profit targets effectively.

To help filter which trade signals you take, and isolate the trend, you may wish to employ other indicators such as trendlines or a moving average.

Forex Engulfing Candle Trading Strategy Entry Point

The traditional engulfing method is to let candles complete before entering. That means once the engulfing candle finishes and a new one begins we enter the trade. Yet price bars are arbitrary. There is no relevance to the close of a 1, 5 or 15-minute candle. Therefore, we are watching for these signals in real-time, and as soon as we see an engulfing pattern with the proper setup we trade it, without letting the bar complete.

In the stock market the daily open and close aren’t arbitrary, they are set and have an impact. Therefore, stock traders may opt to let daily bars complete. Intra-day bar timed bars, in all markets, are arbitrary. If day trading, I always trade a pattern as soon as I see it, and don’t wait for bars to complete.

Figure 5 shows how this works in a downtrend. The little horizontal red lines indicate the entry point.

Figure 5. Forex Engulfing Candle Trading Strategy Entry Point

There are a number of reasons for entering before the bar completes. Mainly, a timed price bar is arbitrary.

Also, it helps to reduce risk. Engulfing candles show a powerful change in direction. If we wait for a bar to complete it may have already run significantly, which means our entry is work, which means our stop loss is bigger and our profit potential is diminished. Look at Figure 5. The little red lines are at a better entry point, compared to waiting for the bar to complete.

Finally, we’re trading with the trend, so the probability is already on our side. Getting in before a bar closes doesn’t change our odds of success.

It is possible that when we look back at our trades, an engulfing pattern may not be present. By entering early we allow for the possibility that by the time the bar closes it is no longer a traditional engulfing pattern. Yet, in real-time, it exhibited the shift in momentum we were looking for, and that is all that matters.

The engulfing signal doesn’t necessarily have to come from one bar either. Assume we have a downtrend, and a pullback moving higher. Then a down (red) bar comes, but it isn’t quite an engulfing candle. A few seconds after another down (red) starts taking out the lows of prior up (green) candles. To me, this is a still a valid entry. Even though it was over a number of candles, it still shows the change direction. Once again, traders need to rid themselves of the notion that there is something magical about the close of a bar, especially in forex day trading. For examples of how to use multiple bars to enter a trend during a pullback, see the ABC Forex Trading Strategy Video. The video also provides some other information which will help in reading trends.

Forex Engulfing Candle Trading Strategy – Final Word

I don’t trade every engulfing candle I see. This strategy is subjective.

The goal of the strategy is to isolate a trend, and then use engulfing patterns to signal the pullback is ending and the trend is resuming. Not every pullback ends with an engulfing pattern though, sometimes we can use multiple bars to signal the end of a pullback. There is no need to wait for the engulfing candle to complete. Once it has engulfed the prior candle, take the trade. Engulfing patterns don’t have a specific profit target, therefore use a Fibonacci extension or a reward to risk ratio. Stops are placed above the high of a bearish engulfing pattern, or below the low of a bullish engulfing pattern.

If trading on a 1 or 5-minute chart, trying using an ECN forex broker with a small spread and low commissions.

Check out my Forex Strategies Guide for Day and Swing Traders 2.0 eBook. It provides more details on how to analyze trades like this, helping you decide which ones offer the best opportunity, and which ones to leave alone.

More than 300 pages packed with strategies and trading info. Available via instant download.

By Cory Mitchell, CMT

Forex Day Trading with $1000 (or less) – A blueprint for how to build an income with a small trading account, by effectively utilizing risk controls, leverage and trading on a small time frame for a few hours a day.

Understanding Forex Market Hours and Sessions and Their Impact – How forex sessions can affect different strategies. Hourly tendencies of each hour of the trading day.

Anticipating Chart Pattern Breakout Direction – A non-traditional approach to trading charts patterns. It requires skill in being able to read the market, but provides a better entry price–providing lower risk and greater profit potential.

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19 thoughts on “ High Probability Forex Engulfing Candle Trading Strategy ”

Cory, what would you do if the pullback wave itself is kinda choppy ?
Is it better for me to switch to timeframe where the pullback wave is not choppy and use engulfing entry there? Or is it better to use other kind of entry ?

Or should I look for the tendency of the choppyness before the area of my entry and adapt the engulfing entry? Let’s say in an uptrend, on the pullback wave price tends to break the high of the last 2 candles before continue down. The engulfing entry setup then modified by placing buy stop at the highest of the last 3 candles (equals to one 3 minutes candles at varying open and close) instead of the last candle. What do you think about this ?

The choppier pullbacks are tougher to time when to get in. But there are a few options.

1. If the choppier pullbacks really provide a lot of struggle, and aren’t producing good results, don’t trade them. Over time you may develop a way to become better at trading them, but don’t force the issue. The next two points will hopefully help with getting better at trading them.

2. Looking for tendencies is good. The point of looking for patterns and trade setups is not to follow them blindly, but try to understand why they work. An engulfing pattern just shows a transition from buying to selling and vice versa. But in a choppy pullback we could have multiple engulfing patterns, so it isn’t a great way to spot a transition back in the trending direction, in this case. But we can use some other analysis techniques which may help us better be able to time our entries. Velocity and magnitude are key ones. For example, even if a pullback is choppy, what we are really looking for is the transition back into the trending direction. As you mentioned, this could mean that we need to entry signal slightly. The standard engulfing pattern may produce too many signals, so we can watch for a pullback to slow down and level off. If this occurs, given that we know the pullback has been choppy we could even wait for the price to start moving up a little bit (assuming pullback is within uptrend) and look for a consolidaiton breakout or engulfing pattern. This is velocity and magnitude on a micro scale. We are watching the pullback for small signals that the pullback direction is dying out, and even that small micro-movements are starting to move back in the trending direction.

So the important thing is spotting the transition. The transition is the point when the tendency of the pullback changes to give us the first indications that the trending traders are taking control again.

3. It is ok to be wrong. During a choppy pullback, we may get stopped out once or twice before the price moves in our expected direction. We can’t let the loss affect us. If it does, we will probably end up missing the good trade. We need to stay watching the chart, and watch for that transition when we see it, we take it. Winning trades are worth more than losing trades. So missing the winner is often where the real damage is done. In my own trading, I have some losing trades almost every day. The difference between the good days and the bad days, is that on the bad days I also missed some of the profitable trades. So on those choppy pullbacks or when conditions are really tough, we need to stay patient and vigilant until the market gives us our moment to pounce.

Spotting the transition, in all different types of market conditions, is what takes the work and practice. We need to see hundreds of different types of scenarios play out before we start to feel comfortable on exactly when we should pull the trigger on a consolidation-breakout or engulfing pattern…or when we may need to alter the entry criteria slightly because we have seen so many types of patterns that we get much better at anticipating what is likely to happen (but we will never be right all the time).

Hi. Thanks for a great tutorial. I have a small question on engulfing patterns. You have said that you normally trade the engulfing patterns before the engulfing candle closes. This is logical and thanks. My problem is this; if you are in an uptrend for example; how would you know whether the engulfing candle is bearish if it has not closed? thanks again

If you are in uptrend, you want to wait for a pullback and then look for a BULLISH candle.

If you are not watching your charts all day, you can wait for the close. For example, if you are looking at daily charts in the evening. In this case, the candle will have closed and you will be able to see it was an engulfing pattern.

If day trading, you will be watching your charts. Therefore, you don’t need to wait until the candles closes. Provided the other conditions are correct, if an engulfing pattern occurs in real-time take the trade. For exmaple: There is an uptrend, the price pulls back, and then forms a bullish engulfing pattern…take it as soon as you see it. The candle doesn’t need to close.

It is possible that by the time the candle does close it may NOT be an engulfing pattern. But that doesn’t matter. We take the trades as they occur in real-time. This is because if we wait for bars to close the entry point will often be worse than if we took the trade as soon as we saw it was an engulfing pattern in real-time.

Hey Cory, i am a beginning trader and would like your help. Is it okay if i post some of my troubling trades seeking your opinion? George out.
By the way great ebook just finished reading it.

Hi Cory,
Was googling for an indicator (as requested below) and came across your lessons…I have read your information on using the trend to ascertain which direction to trade on engulfing candle. Very Good – learned a lot. Thank you.
Do you have an indicator with an on chart arrow and sound alert to notify me when this engulfing candle occurs?
I think I would like to trade it when the engulfing candle happens after say 3 or four opposite direction candles – thus 3 of the four candles were long – now we get a short engulfing candle. Do you have an indicator like that? I like to use the 4 hour chart.
Thank you for the lesson – Great – I’ll be coming back for much more but want to set up my chart with the indicator if available and my trend lines.
Thank you
SnrTrader… 80 years young!)

Thanks for the feedback. At this time I don’t have an indicator specifically for the engulfing patterns. BUT, I am writing an article right now on some trending indicators. Some may be of use to you in there, but there is nothing specifically for engulfing patterns. The article will be posted on the Thursday morning. The indicators do not provide alerts though…but maybe something could be rigged up to do that on your trading platform.

What you talk about is a system I use often. I wait for the price to consolidate–move sideways for at least three bars–and then trade at the breakout point of the consolation, but only if the price breaks out in the overall trending direction. The highs and lows points of the 3 or 4 engulfing bars you talk about could have an alert set to them. That way when you get another bar that breaks past the high/lows of the prior bars, you’ll be alerted to it.

So? What your saying regarding waiting for the candle to close is that we don’t have to wait? If we are trading TF Lower then the daily? Eg 4hr charts?

I encourage each trader to practice a strategy and see what works for them. I never wait for candles to close…as soon as the price passes a point i think will be important, I take the trade. Waiting for candles to close isn’t necessary…in my opinion.

A candle closing is only visually significant to the person trading (provides “confirmation”), but is not significant in terms of actual price action. The odds of success don’t improve by waiting for a candle to close, usually you just end up with a way worse price on the trades that are good. This downfall offsets maybe avoiding a loss or two by waiting for candles to close…and even waiting for a candle to close you will still have as many losing trades. In other words, no benefit to waiting to waiting for a candle to close.

Cool..And I’m assuming that this technique works for you.

Been working since 2005 when I started trading :)…but, it is really more about spotting the trend, waiting for the pullback (these are the hard parts) and then watching for the transition back into the trending direction…this engulfing candle is just one way to see that happening. Other approaches are covered in Spotting Trading Opportunities: http://vantagepointtrading.com/archives/12318 and ABC Strategy: http://vantagepointtrading.com/archives/10612 and How to Day Trade Forex: http://vantagepointtrading.com/archives/14162

Thanks for the Links! I appreciate it!! Will check them out! Happy Trading!

Sorry! One last thing..Your ebook

The Forex Strategies Guide for Day and Swing Traders 2.0

Can I download it on to my Phone *Samsung Mega and read it from there?

The book is PDF format, if that helps answer your question. …I think it would quite tough to read on a phone though with so many charts (would be very squished).

I purchased your book yesterday, and haven’t as of yet received a link to dl it?

Weird. First time that has happened. Emails should go out automatically. I will send it to you within a few mins. Sorry about that Robert.

Engulfing Candle – The Truth No One is Telling You

Verified Profitable Trader

Have you ever tried to trade engulfing bars? Maybe you are currently doing so?

How has that been working out for you so far? A guess would be not so good.

There is a reason why your engulfing candle trading strategy isn’t working.

A simple but powerful truth the so-called price action authorities out there won’t tell you. A truth that reveals trading engulfing bars or any other one- or two-bar reversal pattern for that matter, not only puts you at a great disadvantage in the market, but it also has a very negative impact on your trading performance.

Now you must be asking yourself, if trading engulfing candles is a sub-optimal way of trading, why do so many price action sites and teachers market this way of trading as much as they do?

The reason behind that is very simple. The whole concept of trading simple 1- or 2-bar candlestick patterns from key support and resistance levels is very easy to understand, teach and learn. Thus, it is also very easy to market and sell to any new retail trader entering the trading arena.

Most retail traders come to the markets with unrealistic expectations and are therefore extra vulnerable to the “quick fix” trading approach these patterns offer. “Trade X, Y and Z patterns at A, B and C spots in the market and you’ll be making a lot of profit in no time.”

Other reasons this concept is so attractive for beginning retail traders is:

  1. a) It gives the trader a clear “signal” (reason) to enter the market which means less headache/work for the trader.
  2. b) It gives the trader a false sense of “confirmation”. A way of “confirming” the validity of a level creating the illusion of certainty.

This is of course a myth which we’ve discussed in earlier articles such as this one.

Keep in mind, quick and easy processes rarely lead to high quality results. More often than not, the output equals the input.

Before we go deeper into why trading engulfing bars puts you at a disadvantage in the markets, we have to give a very simple definition of the engulfing candle pattern.

For a bearish example of an engulfing candle pattern:

The A bar is a bullish bar (bar that closed up) and the B bar is a bearish bar (bar that closed down), whereby the high of the B bar is above the high of the A bar, but the close of the B bar is below the low of the A bar. If the low of the B bar is below the low of the A bar, but closes inside the price action of the A bar, then it is an outside bar pattern which is a different reversal pattern.

For a bullish example of an engulfing candle pattern:

The A bar is a bear bar, and the B bar is a bull bar, whereby the low of the B bar is below the low of the A bar, and the close of the B bar is above the high of the A bar. If the high of the B bar is above the A bar, yet the B bar closes inside the price action of the A bar, then it would be a bullish outside bar pattern.

Below are two visual examples of Bearish and Bullish Engulfing Bars:

Now that we’ve established what an engulfing bar is, let’s take a look at why using engulfing bars as a “signal” and/or “confirmation”, is a sub-optimal way of trading and puts you at a disadvantage.

Professional traders do not trade based on any kind of 1-2 bar candlestick patterns, why should you?

There is a reason professional traders make money, whilst the majority of retail traders don’t.

It can also easily be said that when retail traders are getting in the market, professional traders are already in profit.

Let’s look at an example using a chart to illustrate this.

Below is a 1 hour chart of the AUD/USD in which we can see a short-term resistance level that rejected price followed by a breakout and false break. Price then came back to re-test the level again and formed an engulfing bar.

Now, there are two ways to trade these engulfing bars according to the majority of candlestick teachers/sites.

  1. a) Enter at the break of the low of the engulfing bar, or…
  2. b) enter on a 50% retracement into the bar.

Let’s assume we trade this engulfing bar the way it’s taught by most and compare both types of entries to a professional way of trading the same level. We will use the same stop loss- and target location in all three examples.

First out, the trade entering on a break of the low of the engulfing bar. The stop loss is placed at a healthy distance above the resistance level.

As you can see from the screenshot, this trade would have a stop loss of 17 pips and a target of 25 pips resulting in a potential +1.47R

Now, this is how a possible 50% retrace entry would have played out not changing anything but the entry location.

In this example price never retraced back into the bar and continued to sell off. Using this approach, we would have missed out completely on this trade opportunity.

For the sake of this comparison, let’s assume price did pull back to the 50% mark into the engulfing candle. We then would have had a stop loss of 11 pips and a target of 31 pips resulting in a risk/reward ratio of 2,81R.

Not bad, almost a 100% improvement in risk vs. reward.

Let’s compare this to taking the trade directly off the resistance level, again, leaving the stop loss and target untouched.

This is where it gets interesting. This trade would have had a stop loss of only 7 pips and a target of 35 pips, resulting in a risk/reward of 5R(!).

This fact alone should make you raise your eyebrows and realize that using engulfing bars as a way to enter gives you a sub-optimal entry at best.

Now, most engulfing bar traders would argue that using engulfing candles as “confirmation” of a level increases their win rate (which isn’t true!). But, for the sake of the argument let’s play with the thought that it is and give the engulfing bars a +20% higher win rate.

To be able to compare the 3 different examples above in detail, let’s put the numbers against each other over a 100-trade sample size.

Example 1 – Entry at break of engulfing bar:

Entry: 0.75830
Stop loss: 0.76000 (17 pips)
Target: 0.75580 (25 pips)
# of trades: 100
Win rate: 60%
Losing trade: -1R
Winning trade: +1,47R

Calculation: 60 x 1,47 + (40 x -1,00) = 48,2

End Result: +48.2R return over 100 trades

Example 2 – Entry at 50% retracement into EB:

Entry: 0.75890
Stop loss: 0.76000 (11 pips)
Target: 0.75580 (31 pips)
# of trades: 100
Win rate: 60%
Losing trade: -1R
Winning trade: +2,81R

Calculation: 60 x 2,81 + (40 x -1,00) = 128,6

End Result: +128.6R return over 100 trades

Example 3 – Entry at S/R level:

Entry: 0.75930
Stop loss: 0.76000 (7 pips)
Target: 0.75580 (35 pips)
# of trades: 100
Win rate: 40%
Losing trade: -1R
Winning trade: +5R

Calculation: 40 x 5 + (60 x -1,00) = 140

End Result: +140R return over 100 trades

Comparison

Entry at break of engulfing bar (win rate 60%): +48,2R
Entry at 50% retracement into engulfing bar (win rate 60%): +128,6R
Entry from S/R level (win rate 40%): +140R

These numbers should put this discussion to bed once and for all. Why?

Engulfing bars won’t increase your win rate by 20%. Even if they did, the best entry option of the two engulfing bar examples would still produce less profit compared with our entry at the level.

On top of this there are even more things to consider…

  • You will not always be presented with an engulfing bar at your chosen support and resistance levels which further works against you.
  • It will render you passive when perfectly good trade opportunities present themselves.
  • You’ll sit there waiting for a pattern to emerge only to see the move play out in front of your eyes (a move which professional traders are profiting from).

To summarize:

Using the engulfing bar “confirmation” to enter trades is a sub-optimal way of trading, working heavily against your overall trading performance by:

  1. Decreasing your trading opportunities drastically and reducing the number of times you can apply your edge in the market.
  2. Giving you a worse entry.
  3. Increasing the size of your SL.
  4. Decreasing the size of your target.

Engulfing bar traders only have one argument to counter the above. They claim that trading using engulfing bars increases their win rate and thus makes up for the drawbacks mentioned above. Even if that was true (which it is not), the so called “blind entry” still performs better as shown in our calculations above.

By looking at this objectively and comparing the numbers we can see that trading using engulfing bars is a sub-optimal way of trading. The only reason it is so widely spread throughout the retail market is because it makes trading easy, plus the “confirmation” part caters to the lack of trust beginning traders have in the markets and their own trading.

So, the differences between a professional trader’s entry and a retail entry should be very clear by now. Especially with all the other content we’ve posted before.

If you want to continue to have sub-optimal retail entries, then you can use the forex engulfing candle as tool to trade the markets.

If you on the other hand want an entry location that gives you a lot more trading opportunities along with a better overall performance, then you’ll want to adjust your trading method.

This is what we teach in our price action course. Now, if you found this article useful, please make sure to like, share and tweet it below, and we’d love to hear from you what “a-ha” moments you have from this article.

So, please come over to see more content like this on our website at 2ndskiesforex.com where all the discussion is happening and leave your comments there.

But thank you for reading this forex engulfing candle article from 2ndSkiesForex.com, where we teach you how to increase the way you trade, think and perform.”

Now that you’ve read the article and had a chance to analyze the two methods and how they perform differently, which one wins?

What do you think? Please share and comment below.

Best Candlestick Patterns for day traders in 2020

A Brief Introduction and Example to Candlestick Patterns

There are several types of charts that you can use in the financial market. What is not known well by new traders is on the importance of these charts.

A good example of this is on the chart below.

The chart shows a line graph of the USD/JPY pair and a candlestick chart of the EUR/USD pair. These two charts are necessary!

The line chart is a good one to show the trend of the pair. However, it does not tell traders what to do. As such, it is not a useful chart to use when trading.

This is unlike candlesticks, which are the most popular charts. Other types of charts you will encounter in the market are bar charts, step lines, histograms, circles, renko, and columns among others.

What is a Candlestick Chart?

Japanese candlestick patterns are some of the oldest types of charts. These charts were discovered hundreds of years ago in Japan, where they were used in the rice market. Today, these charts are the default when you open most trading software (Ppro8 too!).

They are popular because they give more indications to traders.

Parts of a Candlestick

In the first chart above, you can see that a line chart is pretty basic. It is just a line. Unlike a line chart, a candlestick has more parts that help traders know when to buy and when to sell.

This is shown in the image below.

Candlestick example: Bearish (Black) and Bullish (White)

The two images shows a bullish and a bearish candlestick. The black one is bearish candle while the one on the right is the bullish candle. The black and white parts of the candles are known as the body while the two lines are known as shadows.

Therefore, in a daily chart, a single candle usually represents a day. In a hourly chart, a single chart usually represents a hour. Candlestick patterns in day trading usually work with minute chart.

Benefits of using Candlestick Charts

There are many benefits of using candlesticks patterns when trading. Some of these benefits:

They tell us more – Unlike other types of charts, candlesticks tell us more about the financial asset. For example, they tell us when it opened and when it closed.

More accuracy – Candlestick patterns are usually relatively accurate in predicting the future price of an asset.

Used by most traders – These charts are used by most traders in the market. This means you are in good company.

Reversals and extensions – Candlesticks are excellent in helping you identify reversals and extensions.

A good way to use candlesticks is to use the popular patterns. There are many patterns that have been identified that help to show reversals and new patterns.

Some of the common types of reversal candlestick patterns are:

  • Hammer and inverted hammer
  • Hanging man
  • Bullish and bearish engulfing patterns
  • Dark cloud cover
  • Piercing patterns

among others. Other patterns are morning and evening star, shooting star, and Dojis.

Example of Candlestick Pattern at work

As you see, there are so many candlestick patterns that you can use in the market. In this article, we will look at just one and see how to use it when doing analysis.

When you look at the EUR/JPY pair shown below, there are several candlestick patterns that you can see.

A good one is the one we have labelled a bullish engulfing.

Example of bullish engulfing patterns

To spot a bullish engulfing pattern, you need to first identify when a chart is moving downward trend.

In this, you need to spot a chart with several consecutive bearish bars (in this case, we identified a chart with several red bars). The candlestick pattern is established when a long bearish candle is followed and a smaller bullish candle.

This candle must be completely engulfed by the bearish candle. When this happens, it is usually an indication that a new upward trend is starting.

External useful resources

Definition and simple Candlestick pattern – Wikipedia

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