An engulfing candlestick pattern, sometimes called a Marobuzu, refers to a candlestick chart pattern where the real body of the second candle completely overlaps or engulfs the real body of the first candle. This means that the second candle has a bigger real body than the first one. Engulfing patterns can be bearish or bullish depending on the previous price action and depending on where they appear with recent trend lines and support/resistance levels. For example, an upside-down hammer is a bearish engulfing pattern while a bullish harami pattern is a bullish engulfing pattern.
Engulfing candlestick pattern
The engulfing candlestick pattern is a bullish candlestick pattern that indicates strength in a downtrend. This pattern consists of two candlesticks:
- The first candlestick closes at its lowest point while its body entirely engulfs or covers its prior candle’s real body. If you do not have any other indicators confirming this reversal, you should wait for confirmation of support before placing your trade. Before entering into a trade you should confirm that there are no trend lines stopping price from continuing to head lower.
- The second candlestick must open lower than it closed and must be larger than its real body or shadow, making it completely black. During trading on financial markets, these patterns are often available but they often fail to result in nothing more than buying what was likely to be considered worthless. The bear market weakness over time erodes these patterns leaving them largely un-reliable as tools for identifying sound trades.
However, patterns can be reliable signals if supported by technical indicators such as momentum oscillators and volume traded giving them further reliability as signals indicating reversals. Some say traders new to engulfing candlestick patterns make up too many scenarios which lead to indecision and hesitation with regards to taking their trades.
Some traders say an engulfing pattern provides one thing – ambiguity. Such uncertainty about whether a trade will go through can lead even seasoned traders into holding off from entry which of course increases the probability that they will miss out on significant gains. Deciding when or even whether to take your engulfing candlestick entry signal depends on various things including analysis of market structure, risk management processes and understanding the vitality of the signal.
Example of a Bullish Engulfing Pattern
An engulfing candlestick pattern is a bearish reversal pattern that often occurs at a market top. It consists of two candles, a large white real body followed by a small real body that completely engulfs or covers most of the previous day’s real body. The final, smaller candle’s close must be lower than its open and it must have a short upper shadow and long lower shadow as illustrated below.
Bullish Engulfing Patterns are found when prices move into the overbought territory to signal exhaustion in bulls which then sparks selling pressure that forces prices down towards support levels. This results in an abrupt bearish reversal during strong uptrends which cause panic selling among bulls resulting in heavy selling pressure. While engulfing patterns occur less frequently than other patterns like outside reversals (piercing lines) do, they are quite reliable leading to significant price reversals with high accuracy rates.
Therefore, it makes sense to trade engulfing patterns while you still can because one never knows how much longer such reversal patterns will remain in force. Here’s what you need to know about bullish engulfing formations:
- Traders should enter their long trades on confirmed bullish candlesticks near support while targeting resistance zones for profit taking if possible.
- Entry points depend upon your technical analysis methods but common entry strategies include buying breakouts above swing highs or buying breakouts above channel supports.
- You can also buy pullbacks after first trading long on breaks above resistance especially if confirmation candlesticks form alongside your breakout entries (long shots but not unheard of).
These tactics should help to avoid being stopped too early by temporary rejections before completing your bigger picture target objectives.
Limitations of Using Engulfing Patterns
The engulfing pattern can be used in both bullish and bearish market trends. The pattern only predicts whether a market will close in an uptrend or a downtrend. It does not predict when the trend will reverse, only that it eventually will. It also doesn’t take into account other factors that may affect how long or short term a trend might be. For example, high trading volume over time, fundamentals of individual companies involved in trade etc.
This type of pattern should always be verified by other indicators before being applied to a strategy. Once you have identified a potential engulfing candlestick chart set up, you want to verify that there is still support/resistance behind your chart as well as high volume indicating strength to move prices in either direction (up or down). You also want to make sure you are positioned correctly if entering any trades based on your analysis. For example, using proper stops and limits based on your trade management rules for each position.
