Candlestick forex trading strategies: How to use an engulfing pattern to pinpoint changes in a market trend

Julie Brownlee, Fsp Invest, 09 Jan. 2015

Tags: engulfing pattern, engulfing patterns, candlesticks, candlestick charts, technical analysis, forex trading, forex, chart patterns,

Not only can candlesticks tell you the price action over a certain period of time, they can indicate changes in trend.

It’s a case of getting to grips with the different patterns that candlesticks form.

These patterns can be very useful for identifying potential forex trades and to help you predict the market’s trend.

One important candlestick pattern is the engulfing pattern.

Read on to find out how you can use it in your forex trading…

How to read candlesticks

Candlesticks show the price movement of an asset over a certain period of time. A move up in price gives a green candlestick. A move down in price gives a red candlestick.

The wicks at either end of the candlestick give you information about the number of orders in the market.

So how do you know if you spot an engulfing pattern on a candlestick chart?

What is an engulfing pattern?

An engulfing pattern happens over two days.

On day one, there’s a narrow range candle. On day two, the larger body engulfs that candle, which is the opposite colour of the day one candle.

To put it another way, the entire range of day one is within the range of day two.

You can see this in the graphic below…

Chart of engulfing pattern

What an engulfing pattern shows

Engulfing patterns can indicate reversal points in the market. It shows that the strong orders in the market reject the moves of the previous day. In other words, the market doesn’t agree with the previous day’s price movement.

So engulfing patterns can signal:

  • A bearish reversal if it’s at the top of an uptrend; or
  • A bullish reversal if it’s at the bottom of a downtrend.

Have a look at the chart below. It shows three highlighted areas of bearish engulfing patterns. They show turning points and trend continuations.

Chart of engulfing patterns

So there you have it, how to use an engulfing pattern to pinpoint changes in a market trend.

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