Engulfing Candles - Part 1/2
The open and close set the top and bottom of the body of the candle. The high and low are drawn as a single line above and below the body. Up days are clear and down days are filled in on most computer candlestick charts. These charts are excellent for showing relationships between clusters of down and up days. This in turn helps to understand how the forces of supply and demand are balanced. There are many candlestick chart patterns, most with exotic names like Three Crows, or Dark Cloud Cover. These names are aides to recognising the pattern relationships.
When we move beyond simple pattern recognition, the full power of candlestick charting is revealed. These charts can be used to provide important details about the emotional state of the crowd and the psychology of the market.
Many traders find the “leading indicator” quality of candles and candle patterns, and the exquisite sensitivity of candle trend detection and analysis methods, to be superior in many ways to most Western methods of technical analysis. Steve Nison has stressed the importance of combining the Far Eastern candle methods with the Western methods of technical analysis.
Candlestick charts offer a distinct advantage over the conventional line charts, or even the standard bar charts, since the structure of the Candlesticks form certain patterns, which give vital clues of the price movement. It is well worth studying the numerous Candlestick patterns, as it can give an extra edge to the trader. In these notes we examine the “Engulfing” pattern, which is one of the most reliable patterns of the Candlesticks.
The “Engulfing” pattern is a reversal pattern, which usually occurs at the end of a trend. This pattern generally indicates a trend reversal and subsequently the beginning of the opposite trend.
We will look at the ‘Bullish and Bearish Engulfing’ pattern to get a better idea of this pattern.
A “Bullish Engulfing” pattern occurs when, during a downtrend, the price bar engulfs the previous price bar. Which means that the current bar’s open is lower than the previous bar’s close (the bar opens down), and its close is higher than the previous bar’s open (the bar closed up significantly).