Hi!
I have started to trade with price action about a month ago using pin bars, engulfing bars and the 2-bar.
Anyhow I start to question the engulfing bar because I can not see the logic behind it. Why does it has to engulf the previous bar? What does this actually tell us?
I do understand that it´s a good thing if we are looking for, let´s say a bearish sign, that the lower part of the previous bar is engulfed, because this tells us that we have lower lows = bearish. But I do not understand why it´s a good thing to engulf even the high of the previous bar if we are looking for a bearish sign! higher highs = bullish, don´t you agree?
For example in my opinion a big red candle like the one in this picture (see link) must be just as bearish as any bearish engulfing bar!
For the discussion, let´s ignore that the candlestick is not at a support/resistance.
The only reason I see for keep following the rule of the engulfing bar is for the benefit that strict rules is good for our disciplin. Not a bad reason, but if this is the only reason why we keep hunting engulfing bar, let´s atleast be honest about it 
Would love to hear your thougts about this!
English is not my main language, hope you have forbearance with my grammar.
I believe an engulfing bar has to “engulf” the previous bar, in your example it doesn’t seem to do that and those bars can be seen constantly in any down trend.
Usually a bearish engulfing occurs after a bullish candle and in terms of logic, it is such that there are just so many bearish traders that it completely “ate” up all previous bullish sentiment.
It is a very strong candlestick pattern and one I really like when at a key support/resistance level.
For me it’s, from my limited experience (!), it’s about context. What happened before these candlesticks formed. I think that makes a lot more sense. If there was a big sell off (for example) and there’s a bull engulfing forming you know people are dumping (buying at their TP). This maybe an obvious example, but my point is applying logic to the situation at hand.
Hi there,
r.e. your posted chart
-This isn’t an engulfing bar. You have the definition right, but you’ll want to keep practicing on how to identify these patterns.
-When you say “Lets ignore the candle is not @ support resistance”- I’d suggest re-evaluating that statement.
The price action you’ve circled is a bearish breakout of a horizontal support zone @ 82.00.
Highlighted below are two very common price action candlestick signals.
-The first set is an inside bar. You have a the “A” candle or “mother”, followed by a candlestick that doesn’t breach the high/low- the “B” candle. Traders can enter on a pullback or a break of the lows, targeting the distance of the mother candle from high/low.
-The second set is an
outside bar. Same concept, but the outside bar is ‘engulfing’ instead. Look how price
completely engulfs the previous candle. Strategy to enter is the same. For a true engulfing bar, the actual body of the candle needs to engulf the body of the previous. You can call them whatever you want, but understand this:
-Inside bars are trend continuation patterns
-Outside bars are reversal patterns
Someone had already mentioned that context is more important than the signal. Which is the most important aspect of trading you need to understand. These patterns play out “better” in certain types of environments vs. others, and trade location/context needs to be understood before entering.
Hi!
FOREXunlimited is right. This is not an engulfing pattern.
Going back to your question though, here is the logic behind it.
Ill be talking about bullish engulfing bar (but it is practically the same as the bearish engulfing bar)
For bullish engulfing bar, you need
- Downtrend
- 2-candle pattern.
a. First candle should be a black candle (especially since it is on a downtrend)
b. Second candle should be a white candle
- Open of second candle should be lower than the first candle’s close
- Close of second candle should be higher than the first candle’s open
- In other words, the 2nd candle’s real body should engulf the 1st candle’s real body.
- That being explained here is the logic
a. You have a downtrend, and the bears are having a party
b. The next day the market gaped down (open way below the previous candle’s close), so the bears become even happier, and some got greedy and shorted more. Other bears jump into the bandwagon and started to short.
c. Bulls decided that enough is enough and started buying.
d. Older bears are sleepy so they decided to take their profit and go home. Newer bears realize that the party cant be sustained if the older bears went home. They also see the mess left behind by the older bears, so they too left (and since they came in late, they are disappointed and incurred some loses).
e. Bulls continued to retaliate.
I dont know if that made sense, but that is the psychology behind.
Cheers,
Here’s the logic behind it.
Bullish engulfing candle.
- Bearish candle A is followed by a currently forming bullish candle B.
- B’s current price goes lower than A’s candlestick low.
- Suddenly, B’s price reverses then B becomes bullish.
- B reaches prices above A’s candlestick high.
B. B’s candle closes above A’s candlestick high.
How do you interpret this?
It means that he market is rejecting prices lower than the previous candle and shows preference for the prices higher than the previous candle. Bearish preference becomes bullish.
Bearish engulfing candles are just the reverse of the bullish candle’s process and interpretation.
