Another great forex trend reversal and continuation pattern…
Bullish Engulfing Pattern
SIGNAL: Bullish, Strong
This candlestick pattern consists of two individual forex candles. Since both the signal and the confirmation are contained in the second candle, I will refer to that candle here as the confirmation candle:
Setup Candle: The first candle is bearish and preferably occurs at the end of a significant push downwards in price.
Confirmation Candle: The second candle is a bullish candle whose body is larger than that of the setup candle, effectively engulfing it. The closing price of the confirmation candle is higher than the high of the setup candle.
PSYCHOLOGY AND FUNDAMENTALS
The bullish engulfing candlestick pattern sets up at the bottom of a move down in price. The two scenarios are:
- When it occurs at the end of a long run down in price it signals the exhaustion of the supply of sellers and the drawing in to the market of buyers. At this stage buyers will be more inclined to enter the market on the offer of a currency pair at comparatively cheap levels. In one concerted push they defeat the sellers, exceeding the extent of the effort of the bears during the previous candle and completely reverse price direction.
- The pattern can also occur in an uptrend when price temporarily retraces preferably to a support level. This temporary move downwards may be due to buyers taking profit, sellers moving into the market at the relatively inflated prices, or just normal cyclical market exhaustion as the buy orders thin out. Hence price moves gently down to a level where buyers are ready to once more start moving into the market, pushing price up again.
TRADE ENTRY & STOP LOSS
You can enter either a Buy Stop order 2 to 5 pips in front of the highest price the confirmation candle reached, or if you are confident enough of the move up you can enter aggressively with an At Market order. Either way, your Stop should go 2 to 5 pips below the low of the setup candle. This is a rough guide only: in volatile markets you may choose to extend the stop further out, and for much higher timeframe charts such as the daily you may set stops 5 to 20 or even more pips behind the low of the setup candle.
The larger the bullish candle that confirms the pattern, the more likely price will move up. However, if the confirmation candle is extremely long you may have trouble getting in with a reasonable reward to risk ratio.
For example, you may have to set a stop loss of 50 pips to set the stop comfortably behind the low of the setup candle. If there is a strong area of resistance only 20 pips above current price action, you may consider this to be a low probability trade and pass on the opportunity.
Forex Candlesticks are the MARKET PULSE, defining current Price Action and the Market Sentiment that is driving price action. My candlesticks course covers the seven things you absolutely must know about this most basic building block of price action. It includes the AuthenticFX Forex Candlestick Glossary, the perfect tool for you to master candlestick patterns with: