Today, we’re going to engulf some candles.. No, we’re not talking about an all night candle vigil here. We’re going to learn how to trade one of the most popular high probability trades , the Engulfing Candle Trading Strategy. Now why is the engulfing candle trading strategy popular among traders?Because it’ so easy to spot the with naked eye. In fact, you’ll need your head examined if you miss this one. Majority of traders prefer trading this strategy during daytime trading, although it can be applied in other trading time frames also.
So here is what we’re going to do. As always, we’ll define what the engulfing candle strategy is, and then show you how to trade the engulfing candles.
What are Engulfing Candles?
Well,engulfing candles are candles that engulf the previous candle in the prevailing trend. It basically overshadows the previous bar to signal the end one trend and the beginning of the next one. What you need to understand is that the engulfing candle must have a higher high than the previous candle and a higher low . In other words, the engulfing candle must be bigger and full than the previous candle for it to be considered an engulfing candle.Just think of a full glass of water when looking for an engulfing candle.
Also, when looking for engulfing candles, make sure they satisfy two critical criteria: That they large and obvious, and they form at swing points. Now what do I mean by swing points?swing points are the highs and lows on the chart.(In fact you’ve just reminded me.We’ll touch on trading swing points next session.
Let’s look at two types of engulfing candles. First:
Bullish Engulfing Candle
As the name entails, the bullish engulfing candle kickstarts the bullish trend. the bullish engulfing candle forms when the bigger part completely envelops the downtrend candle. This development signals the beginning of the uptrend or, surge for the hills,as I like to put it. The bigger part signifies the opening and closing prices of the bar, while the wicks (the two tails at the high and low ends of the bar)mark the high and low.
The scenario for the bearing engulfing candle is very similar tot the bullish engulfing pattern. Again,as the name entails the bearish engulfing candle signifies the end of the uptrend and kickstarts the bearish trend or nosedive to the valley.. The bearish engulfing candle forms when the bigger part eclipses the smaller bullish candle. And, just like the bullish engulfing candle.The difference here is that the bears close at a low.Let’s take a look at two graphical illustrations of both bullish and bearish engulfing
Let’s take a look at both bullish and bearish engulfing patterns.
Right in front of us are illustrations of the bullish and bearish candle engulfing patterns. With the bullish pattern, you can see the white bullish engulfing candle eclipsing the small black bearish candle. This signifies the end of the downtrend and the bullish trend. The full part indicates the opening and closing prices, while the short wick(or thin upper tail) indicates the high peak.while And when you see such a setup, don’t think twice about putting in a buy (or long) trade.
It’s the similar situation with the bearish engulfing candle pattern. Except that the bearish engulfing candle signifies the end of the uptrend and the beginning of the downtrend. We have a role reversal in that you now have the black bearish engulfing candle towering over the little white bullish candle. The other difference is that you have two short tails indicating the high and low. When you see this set up, no one should tell you you have to sell. I’ll show you later how to place your trades using both bullish and bearish patterns. So don’t panic.
Which finally brings us to:
How To Trade Engulfing Candle Strategy
Traditional trading wisdom suggests that you wait for the one engulfing candle to fill like like a glass of water before you make your entry trade. One an engulfing candle fills up completely, and the next engulfing candle resumes make your initial trade entry.
The most sensible way to make your entry is to place a pending long order a few pips above the high of a bullish engulfing candle and a few pips below the low of a bearish engulfing candle.
If you want a safe spot to place your stop loss,do it on the opposite side of the engulfing bar. For a bullish engulfing bar you place the stop loss a few pips below the low of the bar. While, for a bearish engulfing bar you , you place your stop loss a few pips above the high of the bar. The stop loss serves a very important purpose for two reasons. First,it gives your trade time to breathe in case the market does an unexpected 360 U-turn. It’s not uncommon for the market to retrace back into the bar and resume on its journey without threatening to crush the entire bar by breaching it at the other end.
Secondly, the stop loss below the bullish engulfing bar serves as a buffer against a sharp U-turn by the market. This sharp U-turn swill definitely spike your blood pressure a few notches, and we don’t want that. Do we? Let’s look at a few illustrations of entry and stop loss placement in both candle patterns – starting with the stop bullish engulfing pattern.
As you can see, the blue arrow indicates the buy entry a few pips above the high of the bullish candle. The stop loss is nicely placed below the low of the bar at the support level.. This gives your trading position some leg room in the event of a market retrace.
Now let’s look at the entry and stop loss situation on the bearish engulfing candle
As you can see,the initial entry is placed below the low of the engulfing bar. The stop loss is placed a few pips above the high of the bar.Also take a look at the way the bar following the bearish engulfing bar pulled back slightly. This is why it’s important to give your trade some leg room in case of any unexpected U-turn by the market.
That’s a wrap for “We’re Going To Engulf Some Candles.”The Engulfing Candle Trading Strategy is highly profitable among forex traders. If you are able to recognize the big bars eclipsing the smaller bars at the end of the prevailing trends, you’re good to go. Next time we’ll touch on how to trade swing points.
Til next time take care.
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