The Engulfing Candle Day-Trading Strategy

Once the retail trade bites the bullet, smart money only needs now to bid the market lower and cause everyone to panic. This in return will trigger more sell stops on the downside and subsequently, the downside move gets amplified. The ranging price action needs to be followed by the engulfing pattern. To develop an effective engulfing trading strategy, we need to establish a proper framework to stack the odds in our favor. When a bullish engulfing is formed, it tells us that the bulls finally won the fight with the bears. It will also draw three exponential moving average lines of 20, 75, and 200.

  1. Traders will then look for confirmation that the trend is reversing.
  2. One of the biggest mistakes traders make is changing their investment strategy.
  3. This engulfing candle indicator has made it easy to identify the pattern without any screen time.
  4. Do not keep changing your approach or you will lose focus and chase the latest information.
  5. Engulfing Candles are formed due to a shift in market sentiment.
  6. When the bullish engulfing pattern appears, the stop loss is placed beneath the long positive candle.

That is, the body of the second candle engulfs the body of the first candle while trading volumes begin to grow. Despite its age, the pattern is still relevant in the 21st century. First of all, it reflects the psychological state of market participants, as well as the balance of power between sellers and buyers in the market. In addition, engulfing is one of the key reversal patterns that warn of an imminent trend reversal.

Since a bullish engulfing is a reversal pattern, it’s most logical to look for the pattern after the market has gone down for a while. Then there is a bearish trend to turn around, which isn’t the case if the market is making new highs as the pattern is formed. Notice that on the way down the USD/CHF pair continues with lower highs and lower lows, which provides for confidence in the downtrend. Suddenly, the price action starts a sideways movement and we mark the upper level of the range with the thin black horizontal line on the chart. The trade should be closed as soon as the price action breaks this resistance and closes a candle above. As you see, this creates a higher top on the chart, which implies that the bearish run might be interrupted.

Engulfing Candle Trading Strategies

The bearish trend was stopped by two reversal patterns, the hammer and the inverted hammer. As such, the engulfing pattern is most useful for short-term trading. Are you curious to see what bullish/bearish engulfing candlestick patterns look like? Watch our latest tutorial video on Engulfing candlestick pattern and find out.


Now, applying the concept of volume to the bullish engulfing pattern could be done in many ways. However, one of the most logical approaches would be to require that the volume for the pattern is higher than the volume of the surrounding bars. High volume shows us that the market performed the bullish engulfing with conviction, which could improve the profitability of the pattern. When the conditions of engulfing candlestick meet, the indicator will highlight the pattern with white or black color. You can also change the color in the settings of the indicator.

The Engulfing candlestick pattern is formed by two candles (two periods). For this reason, it falls in the category of double candlestick patterns. The first step in trading an engulfing pattern is recognizing the formation in real-time.


This candlestick pattern is one of the best trend reversal candlestick pattern in technical analysis. In practice, traders use the bearish engulfing pattern as a signal to enter short positions, typically setting a stop loss above the high of the engulfing candle to manage risk. The pattern is applicable across various time frames and asset classes, but its reliability can vary.

Are There Any Other Chart Patterns Like the Bearish Engulfing Pattern?

So many people will try to buy this initial breakout here when they don’t wait for the candle to close. Engulfing candlesticks can be used to identify trend reversals and form a part of technical analysis. They are most commonly used as a part of a forex strategy as they can provide quick indications of where the market price might move, which is vital in such a volatile market. Again, although the wicks are usually not considered a core part of the pattern, they can provide an idea of where to place a stop-loss.

How to Read Candlestick Charts?

This strategy provides traders with the opportunity to see an objective picture of the market and open trades with visible targets. It should be emphasized that this strategy should be used during a strong trend and from the point of price reversal. By the end of the period, it closes below the opening price of the previous candle.

In a bullish engulfing, the second candlestick is bullish and completely engulfs the first bearish candle, signaling a potential upward reversal. In a bearish engulfing, the second candlestick is bearish and engulfs the first bullish candle, indicating a potential downward reversal. Then, the price successfully tested the first resistance level 24.80, having previously formed another bullish engulfing candlestick pattern.

The image depicts a bearish Engulfing pattern and some rules to trade it. Investors and traders find it best, then, to stick to a well-defined plan and not let emotions dictate actions. However, keep in mind that we only backtested our strategy on stocks and no other assets. Because this website is all about backtesting and making 100% quantifiable settings and trading rules, we’ll proceed to backtest a few trading strategies in S&P 500. A pullback should be composed of at least two price movements, indicating the price has actually corrected.

The pattern involves two candles with the second candle completely engulfing the ‘body’ of the previous green candle. According to strategy, open a buy trade when a bullish engulfing candlestick forms above the 20-period exponential moving average. So, by the confluence of moving average and candlestick pattern, a perfect buy setup formed like engulfing candle strategy the image below. The bullish engulfing candlestick pattern occurs when a larger positive candle follows a small negative candle. The body of the positive candle completely covers or “engulfs” the negative candle. The bearish engulfing pattern typically appears at the end of an uptrend, signaling a potential reversal in price direction.

Since it is a bearish reversal pattern, you look for it after the market has made an upswing, which is the bullish trend to reverse to the bearish side. Being a bullish reversal pattern, you look for it after the market has made a downswing, which is the bearish trend to reverse to the bullish side. An engulfing candle strategy signal doesn’t mean that the trend will always resume.

A bearish engulfing chart pattern is a technical pattern that indicates lower prices to come. It consists of a high (green) candle followed by a large down (red) candle that engulfs the smaller up candle. The pattern is necessary because it signals that sellers have overtaken the buyers. These sellers are aggressively driving the price downwards, more than buyers can push up. This pattern is a two-candle reversal pattern that is a combination of one dark candle followed by a larger hollow candle.