- Candlestick analysis can be worked into any active Forex trading strategy.
- The bullish engulfing candle can spot potential reversals in price.
- Traders can look for candles to signal a resumption of the EURUSD bull trend.
Spotting price reversals and continuations through the interpretation of price action is an important skill for Forex traders to master. Candlestick analysis can help make this process easier. Candle pattern interpretation does not only make navigating the market easier, but it can also be a useful trading tool. With this idea in mind we will focus on recognizing and trading one of the markets most clear cut price action signals, the bullish engulfing candle pattern.
What is a bullish engulfing pattern?
A bullish engulfing pattern is a candlestick pattern normally foundafter a period of downward market pressure. Pictured above we can see that the bullish engulfing candle pattern is actuallycomprised of two completed candles! The first candle will normally depict the end of the currency pairs established weakness. This first candle can come in a variety of shapes and sizes and will vary from chart to chart.While it is notdirectly related to the next engulfing pattern, this candle should denote the end of the markets current decline. Small candles such as dojis are considered preferable in this position though, as they can reflect market indecision in the current trend.
The second candle in the pattern is arguably the most important. As seen above, this candle is expected to stick out from price action and close as a long blue candle. This large move in price signals a return to a bullish market bias with newupward price momentum surging towards higher highs. To be considered a complete bullish engulfing candle pattern, the high of this blue candle should close well above the high of the previous candle. The higher this blue candle advances, the stronger our signal is considered. A new push of upward movement in this position on the chart, reflects new buyers overtaking the previous strength of the sellers.This action can be used in conjuncture with an established uptrend,with buyers looking to enter the market on refreshed strength.
Let’s look at a current example!
Learn Forex – EURUSD with Engulfing Patterns
(Created using FXCM’s Marketscope 2.0 charts)
Charting the EURUSD
Once you are familiarized with identifying the bullish engulfing candle pattern it can then readily be applied to your trading. Above is an excellent example of the pattern in action on a daily EURUSD chart. The EURUSD is currently in a standing uptrend, beginning with a strong bullish engulfing candle completed on July 10th. Along the way there have been price retracements against this now mature trend, but we can see many of these declines have ended in a fresh bullish engulfing candle. These surges in price have confirmed the resumption of the broader trend, while creating new buying opportunities.
Currently, this scenario may be playing out yet again. Highlighted in green, there is another potential bullish engulfing pattern forming on the EURUSD Daily chart. Traders will be watching this candle for a confirmation to signal the resumption of the bull trend after last week’s decline. If the price of the EURUSD does remain supported, traders should take this as a bullish market signal and look for the pair to move towards higher highs.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@DailyFX.com
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