Engulfing candlestick pattern
Family VI · Charts & indicators
Not to be confused with candlestick, chart pattern, flag pattern.
Engulfing candlestick pattern is a two-candle formation in which the second candle's real body completely covers the first candle's real body. It is a reversal signal, appearing after a downtrend (bullish engulfing) or an uptrend (bearish engulfing). The pattern reflects a shift in momentum from sellers to buyers or vice versa.
Structure and identification
An engulfing pattern consists of two consecutive candles. The first candle has a small real body, while the second has a larger real body that completely overlaps the first. For a bullish engulfing, the first candle is typically bearish (close below open) and the second is bullish (close above open). For a bearish engulfing, the first is bullish and the second is bearish. The pattern is more significant when it occurs at the end of a clear trend and is accompanied by higher volume.
Worked example
Consider a bullish engulfing pattern in a stock after a downtrend. The first candle opens at 50.00, closes at 49.00 (bearish). The second candle opens at 48.80, closes at 51.00 (bullish). The second candle's real body (48.80 to 51.00) completely covers the first candle's real body (49.00 to 50.00).
Interpretation and caveats
The pattern suggests that the prior trend may be losing momentum and a reversal could follow. However, it is not a guarantee. Traders often wait for confirmation, such as a close beyond the second candle's extreme or a subsequent candle in the new direction. The reliability of the pattern can vary with market conditions, timeframe, and the asset being traded. It is commonly used in conjunction with other technical tools like support and resistance levels or volume analysis.
Often confused with
- candlestick
- A candlestick is a single chart element representing price movement over a period, whereas an engulfing pattern requires two candles and a specific relationship between them; the visible sign is the number of candles involved.
- chart pattern
- A chart pattern is a broader formation of multiple price bars that outlines a shape like a head and shoulders or triangle, while an engulfing pattern is a specific two-candle reversal signal; the visible sign is the scale and complexity of the formation.
- flag pattern
- A flag pattern is a continuation pattern consisting of a small consolidation after a sharp move, typically shown as a parallelogram, whereas an engulfing pattern is a two-candle reversal pattern; the visible sign is the presence of a trend and a consolidation phase rather than two opposing candles.
See also
- forex technical analysis indicators
- price action
- fundamental analysis
- support and resistance
- technical analysis
- fibonacci