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What is an Engulfing Candle? Complete Guide

Welcome to the world of technical analysis! If you're new to trading, you might have heard the term 'engulfing candle' being thrown around. But exactly what is an engulfing candle and how can you use it to your advantage?

In this article, we'll take a deep dive into the mystery surrounding engulfing candles. We'll explore what they are, what types of engulfing candle patterns exist, how to trade them, and how to use them in your own charting. So without further ado, let's get started!

Introduction to Engulfing Candles

Engulfing candles are one of the most popular and powerful technical analysis signals used by traders. They are used to identify potential reversals in the price trend and are often used in combination with other indicators to confirm the potential reversal.

Engulfing candles are formed when a candle 'engulfs' the body of the previous candle. This means that one candle opens and closes above the open and close of the previous candle. This can be either a bullish or bearish signal depending on the direction of the engulfing candle body.

What is an Engulfing Candle?

An engulfing candle is a type of candle pattern that is formed when the body of one candle completely 'engulfs' the body of the previous candle. This means that the open and close of the engulfing candle are both higher than the open and close of the previous candle.

Types of Engulfing Candles

Engulfing candles come in two types:

  • Bullish Engulfing candles
  • Bearish Engulfing candles

A bullish engulfing candle is formed when the body of one candle closes higher than the open of the previous candle. This is seen as a sign of strength in the market and is often used to identify potential reversals in the price trend.

A bearish engulfing candle is formed when the body of one candle closes lower than the open of the previous candle. This is seen as a sign of weakness in the market and is often used to identify potential reversals in the price trend.

Bullish Engulfing Candle

A bullish engulfing candle is formed when the body of one candle closes higher than the open of the previous candle. This indicates that buyers have stepped in and taken control of the market and can be used to identify potential reversals in the price trend.

bullish engulfing candle

When trading with a bullish engulfing candle, it is important to pay attention to the size of the candle body. The larger the candle body, the more powerful the signal. Additionally, the longer the body is, the more likely it is that the reversal will be sustained.

Bearish Engulfing Candle

A bearish engulfing candle is formed when the body of one candle closes lower than the open of the previous candle. This indicates that sellers have stepped in and taken control of the market and can be used to identify potential reversals in the price trend.

bearish engulfing candlestick

When trading with a bearish engulfing candle, it is important to pay attention to the size of the candle body. The larger the candle body, the more powerful the signal. Additionally, the longer the body is, the more likely it is that the reversal will be sustained.

Engulfing Candle Patterns

Engulfing candles can often be seen forming patterns on the chart. The most common pattern is the 'Engulfing Pattern'. This is a two-candle pattern and is formed when a bullish engulfing candle is followed by a bearish engulfing candle.

This pattern is seen as a sign of a potential trend reversal.

bullish engulfing candle pattern

Other engulfing candle patterns include the 'Inside bar' pattern, the 'Outside bar' pattern, the 'Harami' pattern, and the 'Hammer' pattern. Each of these patterns can be used to identify potential reversals in the price trend.

How to Trade Engulfing Candles

Engulfing candles can be used to identify potential reversals in the price trend. When trading with engulfing candles, it is essential to pay attention to the size of the candle's body. The larger the candle body, the more powerful the signal. Additionally, it is important to look for confirmation from other indicators too.

For example, if you see a bullish engulfing candle, you should look for confirmation from other indicators such as moving averages, support and resistance levels, and trend lines. This will help you confirm the potential reversal and decide whether to enter a trade.

Strategies for Trading Engulfing Candles

When trading with engulfing candles, it is important to have a strategy in place. This will help you to know the good trading opportunities and make better trading decisions.

One strategy for trading engulfing candles is to look for confirmation from other indicators as we explained above.

For example, if you see a bullish or bearish engulfing candle, you should look for confirmation from other indicators such as moving averages, support and resistance levels, trend lines, and other indicators or tools. This will help you confirm the reversal and better understand the market and other factors based on price action.

Another strategy for trading engulfing candles is to look for engulfing candle patterns on the chart. The most common pattern is the 'engulfing pattern'. This is a two-candle pattern and is formed when a bullish engulfing candle is followed by a bearish engulfing candle. This pattern is seen as a sign of a potential trend reversal and can be used to identify potential trading opportunities.

Conclusion

Engulfing candles are one of the most popular and powerful technical analysis signals used by traders. They are used to identify potential reversals in the price trend and are often used in combination with other indicators to confirm the reversal.

By understanding what is an engulfing candle and how to use it, you can start to incorporate it into your own trading strategy. So now that you know what an engulfing candle is and how to trade it, you can start to uncover the mystery surrounding this powerful technical analysis signal.

Ready to start trading with a price action trading tool? Sign up here to learn more!

GENERAL RISK WARNING!

NOTE: This article is not investment advice for anyone because online trading could be a high risk for all who have a lack of knowledge & experience. 86% of traders lose money in financial markets. we are not your financial advisors who guarantee your profit at all.

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