Technical Analysis 101: Engulfing Candlestick Patterns

To the average trader, candlestick patterns are a bunch of crosses and oblong shapes with odd names, like the abandoned baby or the doji cross.  But once understood, even the craziest sounding candlesticks can help make you a fortune.

Look at the engulfing candlestick pattern, for example.

There are two.  There’s the bullish pattern and the bearish pattern. 

The bullish engulfing pattern forms when a small red candlestick is followed by a larger white candlestick that completely engulfs it.  What that suggests is that the bulls have now taken control of the stock price from the bears.  The pattern will also following a stock price decline, and potentially indicate reversal off a low.

The bearish engulfing pattern is the exact opposite.


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These are typically found at top of trend and can be identified when a small white candle is followed by a larger red candle that completely engulfs it.  It can be an indication of a potential reversal off recent highs.

However, just because a candle setup appears doesn’t mean it should be used as a standalone indicator.  Always confirm potential trend reversal by also watching Bollinger Bands, MACD, RSI, Williams’ %R, and Money Flow, for instance.

Let’s look at an example of both candles in action.

Here is a bearish engulfing pattern on Facebook (FB) in early June 2016.  While the pullback that followed didn’t last too long, it was still an indication that bears were now in control following a sizable uptrend.

Here’ is a bullish engulfing pattern on a chart of Blackberry (BBRY).

After a nasty pullback in recent days, bottom of trend may have been marked by the bullish engulfing pattern found.  That could be an indication of potential, near-term reversal higher.  However, again we can’t just buy because a candle appears.  We must look at other confirmation technical tools, as well.

To make money in this market, we have to trade well with confirmation.  Or, you’re really just speculating, throwing money at the wall, hoping some sticks.


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