Engulfing Candle Patterns & How to Trade Them

The market had been in a downtrend but paused and made a higher low just before the Engulfing setup. My only concern here would be that the second candle was very long, meaning traders would require a large stop loss for the trade. Reversal candles should be used in conjunction with other price patterns or technical indicators, combining them with fundamental analysis. The formation of a reversal pattern is a signal to open a trade on a new trend.

  • 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 pattern alone isn’t enough of an edge to trade the markets profitably or successfully over the long term.
  • However, they both warn of a trend reversal and provide strong signals to market participants.
  • The bearish engulfing candle is one of the forex market’s most clear-cut price action signals.

That’s why you often see a strong move down into Support, and then BOOM, the price does a 180-degree reversal. When you get a strong momentum move lower, it’s because there isn’t enough buying pressure to hold up the prices — that’s why the price has to decline lower to attract buyers. In a healthy downtrend, the market tends to stay below the 50-period Moving Average (MA). So that’s when you use the Bearish Engulfing pattern to “confirm” the sellers are in control — and the market is likely to move lower. Yes, a Bearish Engulfing pattern shows the sellers are in control — but it doesn’t mean the price is about to reverse lower.

How to trade Engulfing bars (trigger)

You should consider whether you can afford to take the high risk of losing your money. The EUR/USD was in a steep downtrend, but a quick pause and a new Engulfing pattern provided an entry point into the bearish trend. Now let’s add the key level so you can see how influential these patterns can be with the bullish and bearish candlestick patterns forex proper amount of confluence. The strategy you’re about to learn has three requirements to be considered a valid setup. For example, the following would also be considered a valid engulfing pattern. Combining Support and Resistance with the Engulfing pattern is an excellent price action based trading method.

  • Traders can find this formation in various financial instruments.
  • An example of what usually occurs intra-day during a Bearish Engulfing Pattern is presented on the next page.
  • This specific pattern involves two candles with the latter candle ‘engulfing’ the entire body of the candle before it.
  • If you spot a chart/candle pattern which is contrary to your trade, you may want to close your position.
  • Then, the price successfully tested the first resistance level 24.80, having previously formed another bullish engulfing candlestick pattern.

Note how volume picked up during the formation of the second green engulfing candlestick. This was a clear additional indication that the buyers have overtaken the sellers and that a high-probability bullish reversal was imminent. All three bearish engulfing forex patterns formed right at the end of counter-trend corrections, which led to a resumption of the downtrend afterward. The same pattern can, however, also form at the highs of uptrends before a bearish reversal follows, and not only after counter-trend corrections. If we break that daily candlestick down into what it’s made of, there is just some consolidation and no push up in price at all.

Bullish engulfing pattern trigger

Using a previous support or resistance level as a stop loss will result in a larger stop loss. But it also means there’s less likelihood of getting stopped out too early in the trade, i.e., it can give the trade more breathing room. If I want to see decisive moves, I look for candles with short wicks. In this definition of an Engulfing pattern, I want to see at least the second candle with short wicks, but preferably in both candles for a more powerful signal. To keep the wicks short, I like the body to be at least two-thirds of the entire candle length (this limits the wicks to a third of the candle length). No, the engulfing candle does not have to cover the wick of the previous candle.

The pattern involves two candles with the second candle completely engulfing the ‘body’ of the previous green candle. The bullish engulfing pattern is essentially the opposite of the bearish engulfing pattern discussed above. Instead of appearing in an uptrend, it appears at the bottom of a downtrend and presents traders with a signal to go long. It is characterized by a red candle being engulfed by a larger green candle. The chart shows a series of reversal bullish engulfing candlestick patterns after a long downtrend. These patterns served as a signal for a global price reversal and the beginning of a long-term bullish trend.

The figure predicts a trend reversal more accurately in older time frames. The formation of a bullish engulfing pattern in the chart signals that the price has reached the bottom and is preparing to reverse the trend to bullish. Bearish engulfing patterns are a great way to identify a potential top in a market. The more clues you can gather about a market’s probable future direction, the closer you will be to becoming a successful Forex trader. Notice that on the way down the USD/CHF pair continues with lower highs and lower lows, which provides for confidence in the downtrend.

Intra-day Bearish Engulfing Pattern

Or this setup can be traded from a swing high within a range bound market, or using a technical price pattern. Therefore, either of the these setups you could trade, this pattern is a very powerful signal when spotted within one of these locations. Lets take a look at what a bearish engulfing candle actually looks like.

How did the price approach a level?

The blue candlestick is a bullish candlestick that formed during an uptrend. The large orange bearish candlestick completely engulfs the bullish candle, which starts the pattern. To trade this pattern, traders enter a short position once the price falls below the second candlestick. They place their stop loss if the price reverses and closes above the second candlestick. As traders, we aim to capitalize on new trends when markets change direction.

Engulfing Pattern Stop Loss

The stop loss is placed above the elongated negative candle when the bearish engulfing pattern occurs. While the setup can offer valuable indications of potential trend reversals, traders don’t rely on it without additional confirmation. Complementing the formation with technical indicators and implementing effective risk management strategies to minimise potential losses is essential. When traders are confident in their strategy, they can consider opening an FXOpen account to apply their method in live trading. As with any forex trading strategy, it is important to manage your risk when trading the bearish engulfing pattern.


The bearish engulfing pattern is a two-candlestick formation that indicates a potential reversal from an uptrend to a downtrend in the market. The setup is a common tool among the trading arsenal of price action traders. This article will delve deep into the formation and explain how traders may use it to make more informed decisions. The bearish engulfing candle is one of the forex market’s most clear-cut price action signals. Many traders will use this forex candlestick pattern to identify price reversals and continuations to support their trading strategies.

Pair this with other technical analysis for even more information, such as previous support/resistance areas, moving averages, and current volume. Adding in all that information will help create a stronger game plan. As opposed to the bearish engulfing pattern, the bullish engulfing candle indicates a market move reversal to the upside. The formation of this pattern in the chart precedes a trend reversal in the market. The pattern is common in financial markets and is easy to identify.