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Traders can look for a series of candlestick patterns, but few have the potential to engulf candlesticks.
The engulfing candlestick is easy to explain, it is just one candle that extinguishes the entire previous candle. But working with them can be a bit difficult, and new traders seem to be confused by the format, so in this article, we’ll dive into this topic in more depth. We provide some additional material on this topic in DailyFX Education. We have covered bearish engulfing candlesticks and bullish engulfing candlesticks in various articles, and in this article, we will incorporate this pattern into our broader price action education because they are very doable when they arise.
The key point is that surrounding a candlestick body requires taking out the entire preceding candlestick body – indicating a momentum-driven reversal.
Defining the Engulf
There are two types of entanglement patterns. The first and most common is the engulfment of the entire predecessor. This is more common in Forex or futures markets where prices move 24 hours a day, as the end of one bar is only the beginning of the next one. This means that the closing price of the previous candle is the opening price of that candle. So when we see an engulfing pattern forming, buyers need to intervene (in the sense of a bullish engulfing) to completely obscure the previous bar – and that bar still needs to close at the previous bar’s above the opening price.
The second type of engulfment is less common, but would involve completely engulfing the wick of the previous candle. This will illustrate a wider range than the previous bar, but again both show possible changes in momentum.
Is this better than that? It’s hard to tell since they both say the same thing, but the second one is completely covered with the wick of the previous candle, a strong indication of increased activity.
On the hourly chart of GBPJPY below, I point to some of these patterns that occurred between April 17 and April 22, 2022. Even the wick that swallowed the candlestick erased the entire range of the previous bar.
GBP/JPY hourly chart
Types of Engulfing Candlesticks
Engulfing candlesticks say a lot, and are often approached with some expectation of something to come. This can be important in some specific cases, some of which I’ll describe below.
The Engulfing Reversal
Reversals are notoriously difficult because as traders we’re basically saying, “What happened – is going to change.” In general, it’s generally wiser to stick with the status quo, but when a stick of engulfing When a candle appears above the trend, it can be an important statement. It could also be a sign of things to come.
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Fundamentals of Trend Trading
On the GBPJPY chart below, I’m looking at the trend on the daily chart for Q4 2021. I noticed some engulfment on the left side of the chart, but the “invert” setting can be found further down the chart in red. At the time, the trend for the first three weeks of October was a rise of more than 900 points before the bar appeared on the daily chart.
This is not a full candlestick reversal because only the body of this candlestick engulfs the body of the previous candlestick. This is a clear sign of a shift in momentum, culminating in a very strong reversal.
In particular, the three engulfs I pointed out before this reversal pattern emerged – they continued the day after printing, further illustrate the potential for momentum to continue after printing any of these engulfing patterns.
GBP/JPY daily exchange rate chart (September-December 2021)
The ‘In Trend’ Engulf
Time trends can be tricky. There is an observable trend, so you want to add a directional pull, but it seems a lot of people have the same idea at the same time, which prevents the trend from retracing far enough to provide an attractive entry point. And, if there is a pullback, how does a trader know it’s a pullback and not a reversal? What is the right time to re-enter the trend direction?
Stylish candlesticks can help with this. It’s basically looking for a pullback and then engulfing in the direction of the trend, giving rise to the idea that buyers are back and the trend may be ready to continue making new highs.
The Counter Trend Engulf
Speaking of trends, Engulfs can also help for traders looking to undercut the trend. The basic logic is to wait for engulfment in the opposite direction of the trend, which could turn into a big picture reversal.
Of course, not everyone will be a full-fledged inversion. But – it can help open the door to reversal strategies, and the momentum that this pattern can pass through usually allows for a quick counter-trend movement.
GBP/JPY daily chart
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