A Brief History Of The Candlestick
Candlesticks were developed by Japanese rice traders nearly 300 years ago.
There are a number of different candlestick patterns which are worth keeping an eye out for, but since we haven’t got 300 years, we’re going to have a look at just one of the top candlesticks patterns for now, which should set you off on the right track.
Introducing The Engulfing Pattern
So say hello to the Engulfing Pattern, which is when the second candlestick ‘engulfs’ the previous candlestick in the opposite direction.
This shows a pure rejection of the previous price action and is a definite sign that the market did not take kindly to the previous move. The engulfing pattern can therefore be both a Bearish reversal signal (if spotted at the top of an uptrend) or a Bullish one (if at the bottom of a downtrend).
Bullish Engulfing
A Bullish Engulfing candlestick pattern is when an initial downward candlestick (close lower than open) is immediately followed by an upward (close higher than open) candlestick that is bigger than it, or entirely engulfs it, that is to say the low is equal to or lower than the previous low, the high is higher than the previous high, and the close is higher than the previous open.
Take a look at these charts to help you better understand what we’re talking about.
This essentially means that from a supply and demand point of view, the buyers have stepped into the market to ensure it doesn’t drop any lower. This could then result in a push higher as the buyers overwhelm the sellers. Therefore, it can be taken as a Bullish signal.
Bearish Engulfing
The Bearish Signal is simply the opposite of this, as seen below.
This is a great pattern to look out for and is very effective in two forms, at bottoms and tops looking for turning points, which is relatively high risk, or for trend continuation patterns.
Engulfing In A Strategy
A really nice trading strategy is to look for Bullish engulfing signals in uptrends and Bearish engulfing patterns in downtrends, as they can be good signs of trend continuation.
Like Pin Bars, the real trick to this is to look for obvious signals, the ones that really stand out. For instance, if you have an overall downtrend but have recently retraced higher, you will then get a nice Bearish engulfing which could be a great entry to join the trend lower.
As in the Pin Bar strategy, what we want to look for is the ability to place the stop above the Bearish engulfing high or below the Bullish engulfing low, and then look for at least 2:1 risk reward for the trend continuation.
All comments, charts and analysis on this website are purely provided to demonstrate our own personal thoughts and views of the market and should in no way be treated as recommendations or advice. Please do not trade based solely on any information provided within this site, always do your own analysis.
Editors’ Picks
EUR/USD clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.