Candlestick patterns are essential tools to analyze the market. They can provide signals, which help traders to be able to predict a particular market movement. Therefore, in order to have a better outcome, traders should be familiar with various candlestick patterns, which can occur in the market. In this article, we are going to talk about Engulfing candlestick pattern and its functions. You can use this pattern either in cryptocurrency market or any other financial markets.
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What is Engulfing pattern?
The Engulfing candlestick pattern occurs in two different patterns as bullish and bearish. These patterns are the easiest candlestick reversal patterns to be identified. When using Engulfing candlestick pattern for trading, it’s essential to first scan the charts from monthly, weekly and daily and then to the lower time frames. Because, the bullish and bearish Engulfing patterns take more priority depending on time frame that they formed on.
Bullish engulfing pattern
The bullish Engulfing pattern could be found during bearish trends, it is a two-candle reversal pattern. Bullish pattern occurs in a downtrend, when the second candle completely ‘engulfs’ the real body of the first one, without regarding to the length of the tail shadows. In fact, it is a small red candlestick followed the next day by a large green candlestick and the body completely overlaps or in other word engulfs the body of the previous day’s candlestick. Notice that the first candle of the pattern is bearish and it is fully contained by the body of the next candle, which is bullish. A valid bullish Engulfing would be the beginning of a bullish move after a recent decline.
The bearish Engulfing pattern has exactly the opposite functions compared to bullish Engulfing. This pattern creates a strong potential for a price reversal on the chart. The pattern consists of a green candlestick followed by a large red candlestick that eclipses or “engulfs” the previous candle. A bearish Engulfing pattern can appear anywhere, but it would be more reliable if it occurs after a price surge. What matters is the difference between the open and close price (called real body). The real body of the second candle must engulf the first one.
As a price action trader, the most important thing is to understand the story rather than identifying a pattern. A pattern should be used just as indicator or additional confirmation to make sure that the trade is going to perform in their direction. Therefore, use a pattern only as a confirmatory tool, and not as an analysis tool.