In technical analysis, several patterns are often used, one of which is the engulfing candle.
Let’s learn what an engulfing candle is in full here!
What is an Engulfing Candle?
An engulfing candle or engulfing candle pattern is a pattern with two (2) candlestick bars, which are marked by the last candlestick bar “engulfing” (engulf) the previous candlestick bar.
The last candle has a body (body) longer than the previous candle. This engulfing candlestick pattern is even more valid if it has a short or no tail.
That’s because the long tail reflects the uncertainty of the direction of price movement or the consolidation tendency.
When it appears in a trending market, this pattern signals a trend reversal or reversal.
How to Recognize an Engulfing Candle?
How to recognize this one-candle pattern? Here are the characteristics you need to know:
- There is a strong green candlestick that “swallows” the body of the previous red candlestick (ignore the wick)
- It takes place/occurs at the bottom of a downtrend
- A stronger signal is given when the red candle is a doji or when the next candle closes above the high of the bullish candle.
Types of Engulfing Candles
1. Bullish engulfing pattern
The form or method of the bullish engulfing candle is a signal to open a buy position. In this case, it is ensured that the market movement is truly trending, not moving sideways or consolidating, to get accurate results. Bullish engulfing is usually formed at the end of a downward trend as an indication of a trend reversal to the upside.
2. Bearish engulfing pattern
In contrast to the bullish pattern, this bearish engulfing candle is a signal to open a sell position. Like the first pattern above, it’s important to ensure that the market is trending to get accurate results.
Usually, a bearish engulfing is formed at the end of an uptrend as an indication of a downward trend reversal.
How to Read the Engulfing Candle
Movement Correctly Several steps must be taken to determine the right strategy based on the engulfing candlestick pattern, which is as follows.
1. Pay attention to the previous trend chart
First, when deciding to analyze and make strategic decisions according to the engulfing pattern, it is essential to pay attention to the trading trend charts before the engulfing pattern is identified.
The goal is to identify the current trend and predict future trends.
2. Set stop loss and take profit
A stop loss needs to be set to a loss limit that a trader can tolerate. Ideally, the stop loss point on the bullish engulfing is placed below the low, right when the bullish engulfing occurs.
On the other hand, take profit can be parallel to the asset price before a downtrend occurs.
A bearish engulfing stop loss point should be placed below the high point when a bearish pattern occurs, and the take profit point can be placed in a position parallel to the asset price before experiencing an uptrend.
Conclusion
The engulfing candle pattern is a pattern that consists of 2 candlestick bars. Its shape is marked by the last candlestick bar that “engulfs” the previous candlestick bar.
The type of candlestick on this one can be divided into two: the bullish engulfing pattern and the bearish engulfing pattern.
How do you understand the bearish engulfing pattern? If you know, it’s time to start trading on the Indodax Application and find out the updated crypto prices on the Indodax Market.
You can also learn various other patterns, such as reversal candlestick patterns to how to read candlestick patterns accurately only at Indodax Academy.
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