In the previous article, we have seen how an engulfing pattern looks like. In this article let us look at the conditions which improve the probability of a trend reversal when an engulfing pattern is observed.
- In an uptrend/downtrend, when a candle with very small body (like spinning top and Doji) is engulfed by a candle with large body it strengthens the reversal. The small body shows us how the strength of prevailing trend is weakening and the large body of the engulfing candle confirms the reversal.
- A heavy volume in the second candle i.e. the engulfing candle, will further strengthen the trend reversal.
- If an engulfing pattern is observed after a sharp run in one direction, it has a high success ratio, since the market is overbought/oversold and people look for profit taking.
- The high of a bearish engulfing pattern acts as a resistance and the low of a bullish engulfing patterns acts as a support.
Once can go short keeping the high of a bearish engulfing candle as stop loss and go long keeping the low of bullish engulfing candle as the stop loss. For confirmation of the bearish engulfing patterns, one can wait for another day for the close to be lower than engulfing candles close. And for confirmation of the bullish engulfing patterns, one can wait for another day for the close to be higher than engulfing candles close.