HigherHigh-LowerLow, Engulfing and Double Red!

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Higher/High-Lower/Low, Engulfing and Double Red!

Good Day Traders,

in this article I want to show you three ways for taking trades after a reversal as I do in many cases. These three ways are higher/high – lower/low pattern, engulfing pattern and Double Red/Green strategy. You know that many of my trades are mainly reversals but if I want to take a trade after a reversal I use these methods.

First of all, let’s talk about engulfing. It’s a popular and strong candlestick pattern and I am sure that you have noticed it many times in your charts .Take a look.

In this screenshot we have two engulfing patterns, one bullish and another one bearish. In the first blue box we have the bullish one.Our reversal was made in the red horizontal line and this line is our support.Then it appears a small red candle and after that a big green candle which engulfs the red .This is a buy signal.The next candle is green.In the second blue box we have a bearish signal.The big red candle engulf s the green and the next candle is negative.

Let’s see the second screensot about higher/high – lower/low pattern.It’s a little bit different from the first one.

We have again two signals here.One bullish and another one bearish. Look at the first blue box.The red horizontal line is our resistance.The green candle makes a new higher high, hit in the resistance and makes a reversal. The red candle open below the green and close below the green,too.It’s a sell signal and the next candle is red. In the second blue box we have the opposite.The green candle opens above the red and close above the red.It’s a buy signal and the next candle is green. In this method I am always trying to avoid candles with long wicks.

Double Red/Green Strategy

Another similar way to trade after a reversal is the double red/green strategy. There are many traders who using it especially in short- term trading.

In the first blue box notice that after the reversal in the red horizontal line we have two red candles.The second one close below the first.It’s a sell signal.The third candle in the row is red,too. In the second blue box we have a positive doji star after the last red candle, maybe you can’t see it in the screenshot, and the next one is a green candle which close above the doji. This is a buy signal and the thrid candle is green.

If you read my previous articles you will see that I never take a trade without confirmation. You should always need some confluence to take a solid trade.In these cases the first confirmation for me is RSI. I don’t want the price to be in an oversold/overbought condition because there is a possibilty for a pull back.Furthermore,I avoid to trade these methods if there are whole numbers in the area in which we had a pull back in the past.The same for S/R.Moreover, I don’t trade these methods against the general trade. If you are trading 60 seconds binary options like me, take a look to the 5min chart to identify if there is a strong trend.

Another confirmation might be MACD crossovers but I don’t use it many times because there are many crossover signals. Some of them are good entries but some of them are bad entries and I don’t want to base my strategy only to an indicator’s signal.

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Bullish Engulfing Pattern Definition

What is a Bullish Engulfing Pattern?

The bullish engulfing pattern is a two-candle reversal pattern. The second candle completely ‘engulfs’ the real body of the first one, without regard to the length of the tail shadows. The Bullish Engulfing pattern appears in a downtrend and is a combination of one dark candle followed by a larger hollow candle. On the second day of the pattern, price opens lower than the previous low, yet buying pressure pushes the price up to a higher level than the previous high, culminating in an obvious win for the buyers. It is advisable to enter a long position when the price moves higher than the high of the second engulfing candle—in other words when the downtrend reversal is confirmed.

A bullish engulfing pattern can be identified when a small black candlestick, showing a bearish trend, is followed the next day by a large white candlestick, showing a bullish trend, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.

Key Takeaways

  • A bullish engulfing pattern is a candlestick chart pattern that forms when a small black candlestick is followed the next day by a large white candlestick, the body of which completely overlaps or engulfs the body of the previous day’s candlestick.
  • Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks.
  • Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks.

What Does a Engulfing Pattern Tell You?

A bullish engulfing pattern is not to be interpreted as simply a white candlestick, representing upward price movement, following a black candlestick, representing downward price movement. For a bullish engulfing pattern to form, the stock must open at a lower price on Day 2 than it closed at on Day 1. If the price did not gap down, the body of the white candlestick would not have a chance to engulf the body of the previous day’s black candlestick.

Because the stock both opens lower than it closed on Day 1 and closes higher than it opened on Day 1, the white candlestick in a bullish engulfing pattern represents a day in which bears controlled the price of the stock in the morning only to have bulls decisively take over by the end of the day.

The white candlestick of a bullish engulfing pattern typically has a small upper wick, if any. That means the stock closed at or near its highest price, suggesting that the day ended while the price was still surging upward. This lack of an upper wick makes it more likely that the next day will produce another white candlestick that will close higher than the bullish engulfing pattern closed, though it’s also possible that the next day will produce a black candlestick after gapping up at the opening. Because bullish engulfing patterns tend to signify trend reversals, analysts pay particular attention to them.

Example of a Bullish Engulfing Pattern

As a historical example, let’s consider Philip Morris (NYSE: PM) stock. The company’ shares were a great long in 2020 and remained in an uptrend. In 2020, though, the stock was retreating. On January 13, 2020 a bullish engulfing pattern occurred; the price jumped from an open of $76.22 to close out the day at $77.32. This bullish day dwarfed the prior day’s intraday range where the stock finished down marginally. The move showed that the bulls were still alive and another wave in the uptrend could occur.

Bullish Engulfing Candle Reversals

Investors should look not only to the two candlesticks which form the bullish engulfing pattern but also to the preceding candlesticks. This larger context will give a clearer picture of whether the bullish engulfing pattern marks a true trend reversal.

Bullish engulfing patterns are more likely to signal reversals when they are preceded by four or more black candlesticks. The more preceding black candlesticks the bullish engulfing candle engulfs, the greater the chance a trend reversal is forming, confirmed by a second white candlestick closing higher than the bullish engulfing candle.

Acting on a Bullish Engulfing Pattern

Ultimately, traders want to know whether a bullish engulfing pattern represents a change of sentiment, which means it may be a good time to buy. If volume increases along with price, aggressive traders may choose to buy near the end of the day of the bullish engulfing candle, anticipating continuing upward movement the following day. More conservative traders may wait until the following day, trading potential gains for greater certainty that a trend reversal as begun.

The Difference Between a Bullish Engulfing Pattern and a Bearish Engulfing Pattern

These two patterns are opposites of one another. A bearish engulfing pattern occurs after a price move higher and indicates lower prices to come. Here, the first candle, in the two-candle pattern, is an up candle. The second candle is a larger down candle, with a real body that fully engulfs the smaller up candle.

Limitations of Using a Bearish Engulfing Pattern

A bullish engulfing pattern can be a powerful signal, especially when combined with the current trend, however they are not bullet-proof. Engulfing patterns are most useful following a clean downward price move as the pattern clearly shows the shift in momentum to the upside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don’t provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

Bearish Engulfing Pattern Definition and Tactics

What is a Bearish Engulfing Pattern?

A bearish engulfing pattern is a technical chart pattern that signals lower prices to come. The pattern consists of an up (white or green) candlestick followed by a large down (black or red) candlestick that eclipses or “engulfs” the smaller up candle. The pattern can be important because it shows sellers have overtaken the buyers and are pushing the price more aggressively down (down candle) than the buyers were able to push it up (up candle).

Key Takeaways

  • A bearish engulfing pattern can occur anywhere, but it is more significant if it occurs after a price advance. This could be an uptrend or a pullback to the upside with a larger downtrend.
  • Ideally, both candles are of substantial size relative to the price bars around them. Two very small bars may create an engulfing pattern, but it is far less significant than if both candles are large.
  • The real body—the difference between the open and close price—of the candlesticks is what matters. The real body of the down candle must engulf the up candle.
  • The pattern has far less significance in choppy markets.

What Does the Bearish Engulfing Pattern Tell You?

A bearish engulfing pattern is seen at the end of some upward price moves. It is marked by the first candle of upward momentum being overtaken, or engulfed, by a larger second candle indicating a shift toward lower prices. The pattern has greater reliability when the open price of the engulfing candle is well above the close of the first candle, and when the close of the engulfing candle is well below the open of the first candle. A much larger down candle shows more strength than if the down candle is only slightly larger than the up candle.

The pattern is also more reliable when it follows a clean move higher. If the price action is choppy or ranging, many engulfing patterns will occur but they are unlikely to result in major price moves since the overall price trend is choppy or ranging.

Before acting on the pattern, traders typically wait for the second candle to close, and then take action on the following candle. Actions include selling a long position once a bearish engulfing pattern occurs, or potentially entering a short position.

If entering a new short position, a stop loss can be placed above the high of the two-bar pattern.

Astute traders consider the overall picture when utilizing bearish engulfing patterns. For example, taking a short trade may not be wise if the uptrend is very strong. Even the formation of a bearish engulfing pattern may not be enough to halt the advance for long. Yet, if the overall trend is down, and the price has just seen a pullback to the upside, a bearish engulfing pattern may provide a good shorting opportunity since the trade aligns with the longer-term downtrend.

Example of How to Use a Bearish Engulfing Pattern

The chart example shows three bearish engulfing patterns that occurred in the forex market. The first bearish engulfing pattern occurs during a pullback to the upside within a larger downtrend. The price proceeds lower following the pattern.

The next two engulfing patterns are less significant considering the overall picture. The price range of the forex pair is starting to narrow, indicating choppy trading, and there is very little upward price movement prior to the patterns forming. A reversal pattern has little use if there is little to reverse. Within ranges and choppy markets engulfing patterns will occur frequently but are not usually good trading signals.

The Difference Between a Bearish Engulfing Pattern and a Bullish Engulfing Pattern

These two patterns are opposites. A bullish engulfing pattern occurs after a price move lower and indicates higher prices to come. The first candle, in the two-candle pattern, is a down candle. The second candle is a larger up candle, with a real body that fully engulfs the smaller down candle.

Limitations of Using a Bearish Engulfing Pattern

Engulfing patterns are most useful following a clean upward price move as the pattern clearly shows the shift in momentum to the downside. If the price action is choppy, even if the price is rising overall, the significance of the engulfing pattern is diminished since it is a fairly common signal.

The engulfing or second candle may also be huge. This can leave a trader with a very large stop loss if they opt to trade the pattern. The potential reward from the trade may not justify the risk.

Establishing the potential reward can also be difficult with engulfing patterns, as candlesticks don’t provide a price target. Instead, traders will need to use other methods, such as indicators or trend analysis, for selecting a price target or determining when to get out of a profitable trade.

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