You might want to check out this blog post before proceeding: Candlestick Basics
This post is not meant to be technical nor will it teach you how to trade. It is a simple explanation of the patterns.
Engulfing pattern refers to a two-bar reversal where the second-day candlestick engulfs the first day. And it can be bullish or bearish depending on the direction of the market.
Engulfing Patterns are similar or also known as Outside Reversal Day, but engulfing patterns do not demand the entire range from high to low to be engulfed, only the open and close, in other words, the body of the second bar must engulf the first, but not necessarily the wicks.
The engulfing concept is very self-explanatory, to engulf means to sweep over, to submerge.
These patterns usually indicate a reversal in the market, as you can see in the image below there is an uptrend market when a bearish candle engulfs the previous bullish candle. This is used by investors and traders to predict what might come next, and in this case, it is showing the market´s sentiment and that it will reverse from bullish to a bearish market.
Outside Reversal Day; is considered one of the most reliable patterns, this is similar to the engulfing pattern, second day must engulf the first and it can be bearish or bullish, and close in the opposite direction. It also requires the entire range to be engulfed open ,close, high and low engulfing the first the day.
Bearish Engulfing Pattern; uptrend just like the image above, day 1 a bullish candle, day 2 a bearish candle that envelops or eclipses the day 1 bullish candle, indicating the market might reverse course and a downtrend usually follows. Also known as Bearish Outside Reversal.
Bullish Engulfing Pattern; downtrend as shown in the image below, day 1 a bearish candle and day 2 a bullish candle that engulfs the previous candle, indicating the market might reverse course and an uptrend usually follows. . Also known as Bullish Outside Reversal.
It is important to notice these strategies are not 100%, as nothing is in the trading market, instead, they are historical patterns that usually, but not always, seem to follow through in repeating itself.
Patterns are better when paired with other patterns, volume, and other technical analysis to better foresee the outcome.
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First Published on Winco.io
