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The Basics of Engulfing Patterns

Aug 15, 2008
There are two types of engulfing patterns, the bearish engulfing or the bullish engulfing pattern. Understanding one of them is as easy as understanding both, as they are just opposites. The bearish engulfing happens at the top of the chart and is made up of a positive candlestick that is then engulfed by a negative candlestick during the next period. The bullish engulfing pattern is the opposite; it happens at the bottom of a chart and is made up of a positive candlestick that is then engulfed by a negative candlestick either the same size or larger.

Complete change in mindset

The engulfing patterns represent a complete change in price. The engulfing pattern on short term charts is usually the result of active trading in day trading or scalping. On a one minute candlestick chart, it wouldn't be unlikely to see many of these engulfing patterns as the price nears support and resistance. The change in investor sentiment is very common, especially when buyers and sellers duke it out around certain price points. On a longer term chart, an engulfing pattern wouldn't be so common, but certainly more accurate.

Investing with candlesticks requires a keen eye for their patterns. An engulfing pattern must take up all of the previous candlestick and then some. This part is important because it shows that traders reversed what they thought about the market, leading to a reversal in price. Developing a trading plan for candlesticks, such as the engulfing patterns, would be a good time investment for future reward. A complete trading plan should include all the necessities, particularly what time frames should be included in the candlestick research; for investing, try the 4-hour bars, while for day trading and scalping, try the 1 minute.

Make smart trades

An engulfing pattern should be used with proper risk and money management tips. Never take the trade before the engulfing pattern is entirely complete, otherwise you're fighting with fire and could be buying a stock that is about to drop even further. Setting a stop loss just above or below the first candlestick is a great way to lock in consistent profits while minimizing risk.

Why candlesticks work

Professional traders incorporate candlestick charts into their own strategies to make money. Candlesticks, especially those indicating reversal, are the most important indicators a trader should know before entering the market. Without judging economic forecasts, corporate data, or even intricate technical analysis tools, candlestick charts give all you need to know just from the price. Follow the professionals; they certainly have one thing right with the importance of candlesticks.
About the Author
Leroy Rushing is an active, professional day trader; trading coach; and author. He is the Founder and CEO of Trading EveryDay, a provider of educational trading products and services that are available worldwide. Trading EveryDay has complimentary/FREE products, a Tools of the Trade eBook and a Trading Room Report , that are downloadable for your convenience.
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