The basics of the bullish engulfing candle
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Forex is a complex market. There are so many things happening on your screen that leave many novice traders frustrated, which is one reason why they seek out Forex trading coach services in the first place. Here, we will discuss a component of the charts: the candles and their patterns. More specifically, the bullish engulfing candle. So what is it?
Bullish Engulfing Candle Pattern
The definition can be confusing. We can break this down into two components. For one, the bullish candlestick needs to close higher than the opening of the bearish candlestick. Then, the same bullish candlestick needs to open lower than the closing of the bearish candlestick that precedes it. It looks like this:
So, despite the rather confusing definition, it does not take more than a glance to notice bullish candlestick patterns. One candle’s body completely “engulfs” that of the previous one. If you flip the script, you would get a bearish engulfing pattern.
Types of Engulfing Candlestick
There are two types of engulfing candlestick patterns: bullish and bearish. A bullish engulfing pattern gives the strongest signal if it appears at the bottom of a downtrend and shows a surge in buying pressure. It tends to cause a trend reversal since buyers would buy the dip, therefore causing the price to jump again. What does that mean? It means that a trend reversal indicated by the bullish engulfing pattern tends to occur when and only when the market is in a downtrend. The engulfing candle indicates that people are buying in rapidly, creating an upward momentum and an imminent price surge. You can confirm this trend reversal by using other indicators, support and resistance levels, etc.
The bearish engulfing pattern is the exact opposite. It is strongest if it crops up at the peak of an uptrend and there is a surge of selling pressure. This also causes a market reversal when traders start to sell quickly, driving the price down. So, you want to keep an eye out for it during an uptrend. At a certain point, traders would start selling, which gives the momentum to drive the price down. You would make use of similar indicators and observations as that for the bullish engulfing pattern.
What is the Bullish Harami Pattern?
It might seem confusing, but the bullish Harami pattern is similar to the bearish engulfing pattern, not the bullish engulfing pattern. The difference is the size of the smaller and the relative size of the bullish and bearish candles. That means careful observation must be applied. A bullish Harami pattern occurs when the bullish candle is at least about ¼ the size of the bearish candle that precedes it.
There are other conditions that must be met. For one, this pattern needs to occur during a downtrend. Then, other indicators should show a trend reversal or that the momentum is slowing down. Next, check the size of the bullish and bearish candles. Make sure that the entirety of the bullish candle is enclosed inside the length of the last bearish candle’s body. Finally, look for confluence using indicators and support/resistance levels.
As a trader, assuming that all other indicators point out to an imminent market breakout and an uptrend, make sure to put your stop-loss below the new low. You can then enter the market after the Bullish Harami pattern. Start to plan your exit strategy. A good place to bail would be the latest support and resistance level.
The Hammer Candlestick Pattern
This pattern makes frequent appearances in the Forex market. Just like all other patterns discussed so far, this one also signifies a potential trend reversal. There are two types of hammer candlestick pattern: the hammer and the inverted hammer.
In the hammer candlestick pattern, it shows up as a bullish candle with a very small body and an extended lower wick, which looks like a hammer and hence the name. This shows a rejection of lower prices. If this shows up at the bottom of a downtrend, chances are that a market reversal is happening soon, assuming all other indicators are suggesting the same thing.
The inverted hammer candlestick pattern is the exact opposite. On your chart, it would be a bullish (not bearish) candle that looks like an upside-down hammer. This can make an appearance at the bottom of a downtrend. This occurs when the candle opens at the bottom and then the bulls push the price up, hence the upper wick. Although the price would soon drop down to its opening level, it would close above it, creating a bullish momentum. If this keeps up, the price would go back up.
Candlestick Pattern Scanner and Indicator
Most of the time, you do not need a bullish engulfing indicator since you can just eyeball it. However, if you are using MT4, there are a few user-made indicators you can download. The same goes for the bullish engulfing scanner. Some platforms have that built-in and there is third-party software you can download.
Bullish Engulfing Pattern Reliability
When it comes to reliability, the bullish engulfing pattern, not to mention every other pattern discussed above, has two main limitations. The first is that these patterns happen all the time, but the one that counts only happen during a trend. So when you consider the patterns in isolation, it can give off a false signal. Another thing is that you should not rely on the patterns alone. Always use this pattern in conjunction with other indicators such as RSI, and look at support and resistance levels as well.
For this reason, it is best to seek out a professional Forex mentorship to enable you to set up high-probability and profitable trades. One notable Forex school is AsiaForexMentor. The founder and mentor Ezekiel Chew has a lot of experience and achievements to his name as he has taught many traders about his winning strategy. There, you will learn how to effectively utilize the bullish engulfing candle pattern and more. They have a free lesson sample you can download on their website, so check it out.
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