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Understanding Engulfing Candles

Understanding Engulfing Candles

Richard Krivo, Trading Instructor

Student's Question:Is the following a bearish engulfing pattern?How would you place your stop? Where would you enter? And your target? I need some examples...ThanksInstructor's Response:The candle that you have circled on the chart would not be an example of a bearish engulfing pattern. In order for a candle to be considered engulfing, it must completely "engulf", "swallow up" the candle preceding it. (This would also be true for a bullish engulfing candle.)The bearish (red) candle that was circled on your chart does not engulf the preceding candle.On the chart below you will find three examples of bearish engulfing candles and one example of a bullish engulfing candle.

Understanding_Engulfing_Candles_body_45961d1262737803-post-day-chart-1-05-10-b.png, Understanding Engulfing Candles

Regarding entry and stop placement, if this were a bearish engulfing pattern, the trade would be entered at the open of the candle immediately after the bearish engulfing candle. The stop would be placed as indicated by the red line labeled Stop on the chart below. The limit would be placed at twice the distance of the stop from the entry. For example, if the stop were 100 pips above the entry, our limit would be at 200 pips below our entry. This would ensure that we have a 1:2 Risk Reward Ratio in place on the trade.

Keep in mind that when using candles and their patterns in your trading, the greatest likelihood of success will be when a candle and/or pattern signals taking a trade in the direction of the Daily trend.

To learn more about the use of Candlesticks in your trading, if you have a live account when you have the live Trading Station open, click the Research button at the top. That will take you into Daily FX+. Then click Trading Course and then scroll down through the 15 subjects until you see Candlesticks. Click on it and you will see four lessons dedicated to the interpretation and usage of Candlesticks.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.