Before we begin, if you are unaware of what a candlestick is, I strongly advise you to head over to the "Trading Education" tab and watch the "Introduction to Forex Trading Video". In this video I cover the basics of what candlesticks are and how they are formed.
Briefly, a candlestick contains a particular currency's value at the open, high, low and close of a specific time interval.
For example, a daily candlestick contains the value at the open, high, low and close on any particular day.
A candle is formed by two parts:
2) Wick (a.k.a tail or shadow).
The “Body” represents the range between the open price and the close price for the particular time interval.
The “Tails” represent the highest and lowest values achieved for that particular time interval.
There are various types of candles and one of the most well known are the bullish engulfing and bearish engulfing candlestick patterns.
Engulfing candlestick patterns are one of the most widely used candlestick patterns among professional traders.
I personally look for these patterns all the time and they form and integral part of my trading strategy.
Some important factors to consider when trading the bullish and bearish engulfing patterns are:
Bullish and bearish engulfing candlestick patterns can form in all market conditions. They are a result of price action and market psychology. It is important to understand the principles behind those and to be able to apply them correctly in an ever-changing environment.
A bullish engulfing candlestick formation is a sign that bulls are in control. More people are willing to buy than to sell. The green body (bulls) covers completely the red-bodied candle (bears). This shows the readiness of the market participants to drive price higher. The bullish engulfing candle does not have to engulf the wicks of the previous candle, so long as it completely engulfs the body. If it does engulf the wicks then all the better, however, this is not a key factor.
The exact opposite applies for the bearish engulfing pattern.
A bearish engulfing candlestick pattern is a small green (or bullish) candle followed by a larger red (bearish) candle “engulfing” the small green candle.
See below for examples of bullish and bearish engulfing candles and how they can be applied to structure, moving averages, Fibonacci levels, harmonics and many other trading patterns or chart patterns.
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