Engulfing candle trading strategy that uses this candlestick pattern in a specific way, during the trend, making it a better profitability strategy. The engulfing candle trading strategy allows us to enter a trend at an point and figure trading signals time. Using the trend, and the engulfing candle as a trade trigger, provides a powerful combination. 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. Forex examples are used below, but I also use this entry technique in stocks and futures as well. Up candle completely envelops a prior Down candle. 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. Down candle completely envelopes a prior Up candle. Figure 2 shows an example of a bearish engulfing pattern in the EURUSD. Engulfing candles occur quite often, which is why we need additional criteria to trade them. 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.
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. 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. 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.
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. 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. The traditional engulfing method is to let candles complete before entering.