Trading methods and types

Swallowing Candle Pattern: Candlestick patterns are a fundamental yet important aspect of technical analysis that provide insight into potential trends in security prices. Among these patterns, the engulfing candle pattern is one of the important patterns that helps identify market reversals.

In this article, we will understand what an encroachment pattern is and how traders can use it to identify market reversals.

Swallowing Candlestick Pattern

What is Engulfing Candle Pattern?

The Engulfing candle pattern is a two candlestick pattern that indicates a reversal of the market’s current trend. The first candle in this pattern consists of a small body moving in the direction of the current trend. The second candle has a larger body that moves against the current trend and indicates a reversal in the price of the security. Here the second candle completely surrounds the first candle.

Engulfing Candle patterns can be classified into two types: Bullish Engulfing Candle patterns and Bearish Engulfing Candle patterns. Now let’s understand the characteristics of each of these patterns and how to trade using them.

Bullish candle pattern

The Bullish Engulfing Candle Pattern is a bullish reversal pattern that appears at the bottom of a downtrend. This pattern consists of a red candle followed by a green candle. The first candle is a small red candle that is part of a previous downtrend. The second candle is a large green candle that completely surrounds the first candle.

The wick of the candle is not very important in this pattern. However, it is important to note that the body of the green candle should be twice as large as the body of the red candle. This candlestick pattern becomes more convincing when the body of the green candle sweeps up to the shadow of the red candle. The formation of this candlestick pattern during a downtrend indicates that buyers are entering the market aggressively and taking control. This provides an early signal of further upward momentum.

How to trade bullish candle patterns?

Below are the steps required to effectively trade bullish candlestick patterns.

Identify the pattern. The best scenario for this pattern to work is after a downtrend. This is followed by a large green candle that completely covers the last red candle in the downtrend.

A green candle accompanied by high buying volume will add better confidence to a bullish reversal in the market.

entry: After a large green candle is formed, you enter a buy position on the security when the next candle trades higher than the enclosing pattern.

Stop Loss: The low of the red candle acts as a stop loss trigger for this pattern. If the price falls below the red candle, all entered long positions should be liquidated.

Profit Target: Here the profit target can be the immediate resistance level. You can also use the trailing stop loss method to follow the trend until it is exhausted.

Bearish candle pattern

The Bearish Engulfing Candle Pattern is a bearish reversal pattern that appears at the top of an uptrend. This pattern consists of a green candle and a red candle. The first candle is a small green candle that is part of a previous uptrend. The second candle is a large red candle that completely surrounds the first candle.

Similar to a bullish engulfing pattern, the wick of the candle is not very important. However, it is important to note that the body of the red candle is twice as large as the body of the green candle. This candlestick pattern will be more convincing if the body of the red candle sweeps up to the shadow of the green candle.

The formation of this candlestick pattern during an uptrend indicates that sellers are in control of the market. This provides an early signal of further downside momentum.

How to trade bullish candle patterns?

Below are the steps to effectively trade bearish candlestick patterns.

Identify the pattern. The best scenario for this pattern to work is after an uptrend. This is followed by a large red candle that completely covers the last green candle of the uptrend.

A red candle accompanied by high selling volume will add better confidence to a bearish reversal in the market.

entry: After a large red candle is formed, we enter a sell position in the security when the next candle opens below the engulfing pattern.

Stop Loss: The high point of the green candle body serves to trigger the stop loss of this pattern. When the price rises above the green candle, all entered sell positions should be liquidated.

Profit Target: Here the profit target can be the immediate support level. You can also use the trailing stop loss method to follow the trend until it is exhausted.

Candle pattern is swallowed up by continuation of trend

Enclosing patterns are primarily used to identify reversals in security trends, but can also be used to identify continuations of existing trends.

If a bull market pattern appears in the middle of an existing upward trend, it means that the bullish trend is likely to continue further. Likewise, a bearish absorption pattern in the middle of a downtrend is likely to signal further declines in the security’s price.

A suction pattern accompanied by strong volume will add better confidence in the continuation of the existing trend. However, weak volume along with the pattern may indicate that the current trend has been exhausted.

Finishing

Before concluding our article on the engulfing candle pattern, it is important to note that although this pattern provides insight into a reversal or continuation of an existing trend, it can be successful every time. Therefore, you should use other technical indicators to confirm reversals and set stop losses while trading using this pattern in the market.

Written by Deepak M

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