post of the day

Bullish Engulfing Candle Pattern as Trading Signal

Student's Question:

So far in my limited Forex experience, all examples are from the past (naturally). I am having a much harder time determining that one of these patterns is forming in front of your eyes. In the first example here, it seems obvious that a bullish engulfing candle pattern formed, but there had been no major rally after it, you would not be using it as an example... How can we filter 'might be' patterns from true solid indicators?

 

Instructor's Response:

As much as we all wish there would be, there is no absolute, fail-safe method available to separate the "might be" from the "solid" trading indicators and signals. This is one of the reasons why it is so critical to use protective stops and good money management principles on each and every trade.  

On the example chart, when that bullish engulfing candle closes (we have to wait for a candle to close before we can base a trade on it) a trader could take a long position at the open of the next candle after the bullish engulfing. The protective stop would go below the wick of the red candle preceding the bullish engulfing candle...see the chart below.

As shown in this historical example, had the trader stayed in the trade from the time of their initial entry, they would be enjoying a gain of over 900 pips.

DailyFX provides forex news on the economic reports and political events that influence the currency market.
Learn currency trading with a free practice account and charts from FXCM.

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars