Engulfing candle strategy
An engulfing candle at a key level shows one side taking over decisively. Away from a level, it means little.
Try Engulfing candle strategy on a real day
A real market day with the date hidden. Run the checklist on the chart, then buy, sell or stay out: the real candles answer.
Check every point of the list before you decide. Stay out if the setup is not there.
Steve Nison introduced Japanese candlestick analysis to Western traders in "Japanese Candlestick Charting Techniques" (1991). The engulfing pattern is one of the strongest two-candle reversal signals he describes.
Why it works
A bullish engulfing candle opens below the previous close and closes above the previous open: buyers have erased the whole previous session and more.
Location is everything. At support after a decline, it marks a likely turn. In the middle of a range, it is noise.
The rules
Setup
- Price reaches a marked support (or resistance for shorts) after a move toward it.
- A bullish engulfing candle forms: its body covers the entire body of the previous candle.
Entry
- Buy at the close of the engulfing candle, or on a break of its high.
Stop loss
- Below the low of the engulfing candle.
Exit and management
- Target the next resistance or 2R.
Filters that improve it
- The engulfing candle should be larger than the average of the last ten candles.
Worked example
Illustrative AUD/USD example on 1H: support at 0.6550. A red candle closes at 0.6555; the next opens at 0.6552 and closes at 0.6578. Buy at 0.6578, stop at 0.6545, target 0.6644.
Illustrative numbers, not a recommendation.
Common mistakes
- Trading engulfing candles in the middle of nowhere.
- Placing the stop inside the pattern.
How to practise it
In Candlemind mark the levels before you look for candles. Only take engulfing patterns that touch a level you drew in advance.
Pre-trade checklist
- Key level marked in advance
- Engulfing candle at the level
- Body bigger than average
- Stop beyond the pattern
- Target the next level
Frequently asked questions
Is the bullish engulfing a reliable pattern?
It is more reliable at support and after a decline; on its own it is a weak signal.
Does the wick need to be engulfed?
The classic definition uses the bodies. Engulfing the wicks too shows even more strength.