September 19, 2008
Engulfing Patterns
By Planet Wealth
Japanese Candles have long been a popular choice to add to a trading system. Today I’m going to talk about a powerful reversal pattern, that when used in unison with other elements of a trading system can produce great results.
Engulfing Patterns are found at the the top or the bottom of a move. For a Bullish Engulfing Pattern we would find them after a downward move, signaling it may have come to an end and the buyers have taken swift control.
This pattern consists of two candles, the first being red and the second being green. The size of the red body is not that important, the second candle is a much larger green candle that “engulfs” the full range of the red candle. The larger then engulfing candle, the more powerful the move. As always good volume is a key to this patterns higher success rate.
In the following chart you can see a down move and a bullish engulfing pattern formed on higher volume.
(click on image to enlarge)
We can then see what happened the very next day:
A Bearish Engulfing Pattern would be in reverse. After an upward move there would be a small body green candle with a large engulfing red candle. This could be the signal of sellers taking control.
Again, in conjunction with other indicators, this can be a powerful charting pattern to identify when the market has ‘turned’, at least for the short term.
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