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How Much of a Candle Needs to be Engulfed

How Much of a Candle Needs to be Engulfed

Richard Krivo, Trading Instructor

Instructor's Response:

 
1) The body of the second candle must engulf the body of the prior candle completely. If the wicks are engulfed as well, even better.
 
2) The stop would go above the highest level to which the pair traded in the pattern...just as you have it. Personally, based on the chart submitted and posted below, the most prudent stop would be above the wick of the candle to left of the one being engulfed.  
 
Yes...that can be a deep stop but the potential for a successful trade is increased. Keep in mind that since this USDCAD pair is in a downtrend on this Daily chart, the fact that the bearish engulfing candle signals a short entry (in the direction of the trend) is a higher probability trade.
 
Regarding stop placement in general...
 
Remember before you enter a trade to always determine how much the loss will be if the stop is triggered. If it is more than 5% of the account size, we advise that the trader pass on the trade.chart 4 22 10

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