Engulfing candles are a popular chart pattern in forex trading that can provide valuable information about potential price reversals. In this blog post, we will explore what engulfing candles are, how to identify them, and how they can be used in forex trading. What are Engulfing Candles?
Engulfing candles are candlestick patterns that occur when a small candle is completely engulfed by a larger candle that follows it. The larger candle completely covers the body of the smaller candle and can have a different colour, indicating a shift in the market sentiment. There are two types of engulfing candles: bullish engulfing and bearish engulfing. A bullish engulfing candle occurs when a small bearish candle is followed by a larger bullish candle, which completely covers the bearish candle's body. This pattern suggests that the market sentiment has shifted from bearish to bullish, and a potential uptrend may be forming.
Conversely, a bearish engulfing candle occurs when a small bullish candle is followed by a larger bearish candle, which completely covers the bullish candle's body. This pattern suggests that the market sentiment has shifted from bullish to bearish, and a potential downtrend may be forming.
How to Identify Engulfing Candles
To identify engulfing candles, traders should look for a small candlestick that is followed by a larger one. The larger candle should completely engulf the small one, with no part of the small candle's body visible. The colour of the larger candle can also indicate the direction of the potential trend reversal. Engulfing candles can occur on any timeframe and in any market, but they are most effective when they occur on higher timeframes, such as daily or weekly charts, and in trending markets.
How to Use Engulfing Candles in Forex Trading
Engulfing candles can be used in forex trading to identify potential trend reversals and to make trading decisions. Here are some ways engulfing candles can be used in forex trading:
As a confirmation signal: Engulfing candles can be used as a confirmation signal for other technical indicators, such as moving averages or support and resistance levels. If an engulfing candle forms near a key level or a moving average, it can indicate a potential reversal.
As a trade entry signal: Traders can use engulfing candles as a trade entry signal. For example, if a bullish engulfing candle forms after a downtrend, traders can enter a long position with a stop loss below the low of the engulfing candle. Similarly, if a bearish engulfing candle forms after an uptrend, traders can enter a short position with a stop loss above the high of the engulfing candle.
As a stop loss level: Engulfing candles can also be used as a stop loss level. For example, if a trader enters a long position after a bullish engulfing candle, they can place a stop loss below the low of the engulfing candle.
Conclusion
Engulfing candles are a valuable tool in forex trading that can provide insights into potential trend reversals. Traders should look for these patterns on higher timeframes and in trending markets. Engulfing candles can be used as confirmation signals, trade entry signals, and stop loss levels. However, as with any technical indicator, traders should always use risk management strategies and trade with caution.