The-Engulfing-Pattern

How Much Important The Engulfing Pattern Is? An Exclusive Sneak Peak In 2023

Before hopping into the engulfing pattern let’s recall the names of the previously discussed candles (Hammer & The Hanging Man) which portray single-lined patterns (A candlestick having solely the power to reverse the trend on its own). But it is the fact that most of the patterns appear double-lined (Patterns forming by the combination of more than one candlestick) and the engulfing pattern is among the top-tiered double-lined patterns.

Formation of the pattern

This pattern can either be bullish or bearish. If the successive candle of the pattern is green colored and the predecessive was red then this is considered to be the “Bullish Engulfing Pattern” and vice versa for the “Bearish Engulfing Pattern”.

There are certain criteria that have to be fulfilled for the formation of this pattern:

  1. The market should have evolved the clearly way up i-e its uptrend movement has to be confirmed first for a bearish engulfing pattern, and a downtrend for a bullish engulfing pattern.
  2. The real body of the second candle must be big enough to engulf the real body of the prior candle regardless of its wicks.
  3. The real body of the second candle must be of the opposite color (Exceptions are there for the Doji).

Increasing the likelihood of this pattern

  • If the engulfing candle (the second-day candle) emerges after an extended fall or rise for the both bottom reversal and top reversal pattern then the likelihood of the engulfing pattern gets increased.
  • If the first-day candle has a very small real body or is a spinning top or a Doji and the second-day candle (the engulfing one) has a very large real body then the impact of this pattern will be the powerful one.
  • If the volume of the successive candle is very excessive than the first-day candle then the likelihood of this pattern gets increased.

Demarcation of Support & Resistance area through this pattern

One of the main advantages of this pattern is that it can be used to realize the support and resistance areas of a particular trade. For the bullish engulfing pattern the support area would be the lowest low of the bullish engulfing pattern whichever candle is lowest (whether it is the lowest low of the first-day or second-day candle) and similarly, for the bearish engulfing pattern the resistance area would be the highest of the bearish engulfing pattern whichever candle’s wick is the highest (whether it is the highest high of the first-day or second-day candle).

Note: These techniques would be ideal if the patterns emerge after an extended fall or extended rally.

Limitations

These candle lines don’t provide or predict the price targets that’s why establishing the potential reward percentage is quite a tough task. So it is recommended for the traders to try other western indicators as well along with this Japanese pattern for setting the price target for a certain trade.

Determination of the risk-reward ratio is sometimes a tough task with this pattern. Sometimes, the second candle of the pattern may likewise be enormous. This can leave a broker with an exceptionally enormous stop loss so the possible reward from this particular trade may not legitimize the risk being taken.

The bottom line

Enhance your candlestick knowledge by figuring out What are the Candlestick Lines and how do we draw them?

The engulfing candlestick pattern is only one of the various candles. So, look into The Important Candlestick Reversal Patterns as well for a better understanding of the trading charts.

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