What’s an Engulfing Pattern?
By Ryan Litcfield
I have been asked so many times about Japanese Candle Patterns and a common theme is misidentification of otherwise simple patterns. One that comes up very often is the Engulfing Pattern.
The Engulfing Pattern has (as all patterns do) very specific definitions. Now all patterns can have some variations, but it seems that this one in particular gets misidentified. So let’s learn how to properly recognize an Engulfing Pattern.
Let's set the stage. The body of the candle is the difference between the open and close.
An Engulfing Pattern is an example of an Outside Day, and the body is the key to recognition. The tails (high and Low) do not factor into the definition. Outside Days happen when the body of one day is overshadowed by the next day. Day two’s body has a higher high and a lower low; it seems to engulf or consume the previous day's candle. It does not matter if day two is bullish or bearish. Here are several Outside Day patterns, but not a single Engulfing pattern.
The Engulfing pattern is a very specific version of the Outside Day and there are two keys to properly recognize it. First, day one must be a normal or bigger than normal day the same color as the directional move (up or down). Day two must be the other color and engulfing. That means in a down trend, a bearish candle is followed by a lower open and a higher close and vice versa.
The most common identification mistakes are directional and size. First of all, it is not possible to have a Bullish Engulfing Pattern in an uptrend and or vice versa.
It is not hard to pick up on Outside Days, but many people will misidentify a variety of Outside Days as Engulfing, because the Engulfing of the first day is easy to spot.
The second problem is size and this is not a tough one to solve. Just make sure the day one candle is the right color and normal or bigger than normal in size. While all Outside Days have a message and can be interpreted, the classic Engulfing patterns are specifically named and recognized as significant reversal signals. My DVD set “Trading by Candlelight” is a full day of the best Japanese Candlelight training you can get.
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