How To Trade Engulfing Candlestick Pattern with Market Structure --- Forex Trading (How engulfing candlestick works)

 

If you're a candlestick trader, you're probably familiar with the Engulfing candlestick pattern. It is one of the most popular pricing patterns due to its unusual appearance and dramatic name. 

Let's look at how to create a strategy by looking for this pattern within an ideal market structure in this tutorial.

First, let's look at what the candlestick engulfing pattern is in Forex trading:

WHAT IS THE CANDLESTICK ENGULFING PATTERN?

To begin, here are a few crucial aspects to remember about the Engulfing candlestick pattern:

• It's made up of two candlesticks.
• The second candlestick's body totally engulfs the previous candlestick's body.
• The pattern's bullishness or bearishness is determined by the second candlestick.
• It denotes a complete shift in market mood.

Let's look at what it looks like:

Bullish engulfing candlestick

WHAT DOES IT MEAN TO HAVE AN EXCELLENT ENGULFING PATTERN?

The technical description of the Engulfing candlestick pattern is that the body of the second candlestick engulfs the first.

However, the best Engulfing patterns have the following characteristics:

• Not only does the second candlestick envelop the first candlestick's body, but it also engulfs the entire first candlestick.

• The second candlestick's shadows are barely visible, indicating a hasty turnaround.

• The inside bar of the second candlestick is not present. (Because the Engulfing pattern concentrates on the candle bodies, this odd shape is conceivable.)

Now the question most forex traders ask about engulfing patterns is: "How can I trade an engulfing pattern? Below I will answer the best way to trade an engulfing pattern.

WHAT IS THE BEST WAY TO TRADE AN ENGULFING PATTERN?

When used correctly, an Engulfing candlestick provides a strong trade setup. Moving averages and oscillators are common approaches for analyzing the market context.

However, in this tutorial, we'll look at an approach that keeps close to the ebbs and flows of market action. To analyze the market structure and steer us in the proper direction, we'll look at swing highs and lows.

The association between swing pivots (both highs and lows) that helps us determine market trends and ranges is referred to as market structure.

CANDLESTICK ENGULFING TRADING GUIDELINES

After identifying our trading bias through an examination of swing pivots, these instructions aim for a retracement entry using the Engulfing candlestick pattern.

BULLISH ENGULFING

• Swing high and swing low are both higher. (Thus higher swing high and higher swing low)

• You buy if you have a bullish engulfing candlestick pattern.

• The pattern's high must remain below the prior swing's high (to ensure that the market is still in the pullback phase)

BEARISH ENGULFING

• Lower swing high and Lower swing low

• Sell if there is a bearish engulfing candlestick pattern

• The pattern's low must remain above the swing low from the previous swing.

Now let's look at the entry point.

STOP-LOSS PLACEMENT AND ENTRY POINT

Let's go over the many choices for precise entry and stop-loss points. The bullish pattern is depicted in the diagrams below.

Let's start by looking at our entry possibilities.

An entry point for bullish candlestick pattern

There are two ways to get in:

Use a market order to enter once the Engulfing candlestick has closed — this is more aggressive.

Using a buy stop order, enter whenever the market breaches the peak of the Engulfing candlestick – more conservative.

Option #2: If the market falls enough to nullify the bullish setup before triggering our buy stop order, we may be able to avoid entering a bad trade entirely. Naturally, assuming the same trading risk, the cost is a lower reward-to-risk ratio.

The pattern stop for a bullish Engulfing candlestick pattern is shown in the diagram below.

Bullish Engulfing pattern stop-loss point

The Engulfing candlestick's low is the default pattern stops.

You can, of course, use volatility stop-loss tactics as a viable alternative.

While the entry and stop-loss can be linked to a candlestick pattern, the target is more dependent on the overall market situation. It all comes down to the surrounding support and resistance levels, as well as any chart structure that is acceptable for target projection.

TRADING EXAMPLES WITH ENGULFING CANDLESTICKS

This section offers random examples from a variety of timeframes and markets, including both winning and losing settings, for a balanced approach.

EXAMPLE ONE: WINNING TRADE WITH ENGULFING PATTERN

This is an Allergan daily chart (AGN on NYSE). It depicts a market crash that wiped out months of gains.

Example of engulfing candlestick pattern

To begin our stalking, we sought a set of lower swing highs, as is customary.

Our trading criterion for building a bearish bias was met with this lower swing low. It's worth noting that the lower swing low was produced as a result of a large down gap. Our negative expectations were reinforced by this display of bearish momentum.

The apex of the down gap served as a potential level of the barrier. The bearish Engulfing candlestick pattern's quality as a short setup improved as a result of this.

It is crucial to maintain momentum. It's one of the most important aspects of picking the best transactions.

Take a look at the examples above. The successful trades had apparent, significant momentum on their side, aside from the right market structure.

TRADING ENGULFING CANDLESTICKS WITH MARKET STRUCTURE: A REVIEW

Engulfing candlestick patterns are used in many trading methods as a signal for large trend reversals. Reversal trading, on the other hand, usually has a lower likelihood but a bigger payout. While some traders may be happy with that risk profile, others may prefer to follow the trend.

You can limit your risk and improve your odds by using Engulfing patterns for continuation trades, as explained above.

Confirmation is a well-known concept in candlestick trading. After the Engulfing pattern, it suggests waiting for one more candlestick to complete. (A bullish candlestick would confirm a bullish pattern, and the other way around.)

Our reward-to-risk ratio, on the other hand, will suffer as a result. Furthermore, because of the third recommendation above, if you wait for confirmation, the trading setup will most likely become invalid. This rule prevents us from entering trades with a low reward-to-risk ratio.

Using a stop order for your entry, as we described before, is a good compromise. Place a sell stop order below the bearish Engulfing candlestick, for example. It provides some evidence of the declining market without significantly distorting our reward-to-risk ratio.

The simplest technique to track market structure is to look at swing highs and lows. While you can do this without using any trading indicators, new price action traders may benefit from using moving averages to aid with consistency.

Read also: 5 tricks to control your emotions in forex trading.

Although this method produces perplexing indications during deeper multi-legged pullbacks, its simplicity remains appealing. Paying attention to the market structure will help you filter bad bets regardless of your trading technique.

Develop your ability to analyze market structure, and you'll find it useful in any trading approach.

Finally, in crowded markets, numerous Engulfing candlestick formations with no follow-through are possible. In a sideways market, be cautious and avoid signals. To avoid trading in a congested zone, look for obvious swings.

You may also like to read: 5 tricks to control your emotions in forex trading