Japanese Candlesticks Theory
Engulfing Pattern
The Engulfing pattern is formed when:
- There is a distinct tendency on the market either down or up (even a short-term).
- The second real body engulfs the body of the first candle (shadows may be not engulfed).
- The second real body should be of the opposite color and be white if the bullish engulfing pattern is formed and be black in case of the bearish engulfing pattern.
Bullish and Bearish Engulfing Patterns
There is an exception for the third point when the real body of the first candle is too short so it is considered to be a doji. This means that after a long-term downtrend tiny white real body is engulfed by a tall white next candle's real body, and after the long term uptrend tiny black real body is engulfed by a tall black real body of the second candle.
Bearish Engulfing Pattern
Bullish Engulfing Pattern
Factors that increase the importance of Bullish and Bearish Engulfing Patterns:
- The first candle has a tiny real body and the second candle has relatively longer one. The previous trend is being swept away by the opposite forces.
- The pattern appears after a long-term or impetuous tendency. If trend is a long-term then all buyers (sellers) have taken their decisions and no more buyers (sellers) are expected to initiate positions. This means that the trend has come to the end. Fast price movements “spread” the market and make traders to fix quick profits/losses by closing positions.
- The second candle is associated with a large volume trading. This means that the prevailing trend is blowing off.
- The second candle engulfs several real bodies.
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