The Engulf candlestick pattern has been used for ages to predict price movements by Japanese rice traders to create wealth, due to its ease of recognition and application in the Financial markets. However this chat pattern is not a ‘Holy grail’ system but provides 70% winning accuracy signals if well applied. It is a reversal based candlestick pattern system which is based on Bullish and Bearish Engulfment. It works best when trading the signals along with the major trend, as they say “the trend is your friend”. However, it can also be applied against the trend but requires deep analysis if the underlying trend is getting exhausted.
Indicators: 2 Candlestick pattern. Stochastic or RSI to spot oversold and overbought activities.
Currency Pair: Works for all currency pair, however i only trade on Majors (GBP/USD, EUR/USD, AUD/USD, NZD/USD, USD/CAD, USD/JPY).
Entry rule for Buy Signals:
-Spot a bullish trend by waiting for a cross of 21 and 55 Exponential Moving Average to the upward direction.
– Let price retrace back to the oversold region in the stochastic (20 or below value) or RSI(30 or below value) oscillator.
-Then wait for price to download a full sell candlestick ( candle A), this candle might contain a wick or not, doesn’t really matter.
-If the next candle (Candle B) forms a bullish candle breaking and closing above the open price of the previous sell candle (candle A).
-Buy at the open of Candle C.
A diagram below showing a typical example of a bullish engulfment.
Entry rule for Sell Signals:
-Spot a bearish trend by waiting for a cross of 21 and 55 Exponential Moving Average to the downward direction.
– Let price retrace back to the overbought region in the stochastic (80 or above value) or RSI(70 or above value) oscillator.
-Then wait for price to download a full buy candlestick ( candle A), this candle might contain a wick or not, doesn’t really matter as well.
-If the next candle (Candle B) forms a bearish candle breaking and closing below the open price of the previous buy candle (candle A).
-Sell at the open of Candle C.
A diagram showing a typical example of bearish engulfment.
Setting Stop Losses and Take Profits:
-Discretion could be applied doing this but in order not to go through mental stress, intraday or weekly pivot points could be used.
-Also in order to reduce stop losses, you can wait for Candle C which acts as the trigger candle to retrace up and test the low of Candle A for sell signals and also a retrace down to test the high of Candle A for buy signals, only that sometimes price might not retrace at all and just keep heading your way.
-Default stop loss of 20-25 pips and 40-50 take profits can also be implemented, this depends how volatile the currency pair in question is.
-For traders who cant sit on the computer to watch the market 24/7 monitoring entries, this strategy can be applied in every open session(Sydney, Asia, Europe, London and New York) and its first 3 active hours which accounts for most of the volume of activity in the market.
-Another method is to apply this strategy after the release of fundamental economic news releases.