Candlestick Patterns: Engulfing and Advanced

Multi-candlestick patterns provide stronger signals than single candles. Engulfing patterns are among the most reliable reversal signals. [DEFINITION] Engulfing Pattern: A two-candlestick reversal pattern where the second candle's body completely engulfs (covers) the first candle's body. ### Bullish Engulfing **Requirements:** 1. Downtrend preceding the pattern 2. First candle is bearish (red/black) 3. Second candle is bullish (green/white) 4. Second body completely covers first body [EXAMPLE] After a decline, Day 1 shows a red candle from $51 to $50. Day 2 opens at $49 but closes at $53—completely engulfing Day 1's body. Buyers overwhelmed sellers. ### Bearish Engulfing **Requirements:** 1. Uptrend preceding the pattern 2. First candle is bullish (green/white) 3. Second candle is bearish (red/black) 4. Second body completely covers first body [TIP] The larger the engulfing candle relative to the first candle, the stronger the signal. A massive engulfing candle shows overwhelming force. ### Other Advanced Patterns **Morning Star (Bullish):** Three-candle pattern at bottoms: 1. Large bearish candle 2. Small indecision candle (gaps down) 3. Large bullish candle (closes into first candle's body) **Evening Star (Bearish):** Three-candle pattern at tops: 1. Large bullish candle 2. Small indecision candle (gaps up) 3. Large bearish candle (closes into first candle's body) **Three White Soldiers:** Three consecutive bullish candles with higher closes—strong bullish continuation **Three Black Crows:** Three consecutive bearish candles with lower closes—strong bearish continuation [KEY] These multi-candle patterns are more reliable than single candle patterns because they show a clear shift in market psychology over multiple sessions. ### Volume Confirmation **Strong engulfing patterns have:** - Above-average volume on engulfing candle - Increasing volume over the pattern - Gap between candles (not required but stronger) [WARNING] Engulfing patterns in the middle of a trend or in choppy markets are less meaningful. Look for patterns at significant support/resistance levels or after extended moves. ### Trading Engulfing Patterns **Entry:** After confirmation (next candle follows through) **Stop-loss:** Below engulfing candle low (bullish) or above high (bearish) **Target:** Next support/resistance level or measured move [EXERCISE] You see a bullish engulfing pattern at a major support level after a 15% decline. Volume on the engulfing day is 3x average. The next day opens higher. Describe your trade setup. |ANSWER| Entry: Buy on next day's open (or after seeing strength). Stop-loss: Below the engulfing candle's low (your risk). Target: Next resistance level or 1:2 risk-reward ratio. This is a high-quality setup—engulfing at support, high volume, confirmation, after significant decline. [SCENARIO] You identify a bearish engulfing at a high after a long uptrend. Volume is average. The next day, price trades slightly lower but closes in the middle of the day's range. Is the pattern confirmed? The pattern is weakly confirmed at best. Ideal confirmation would be a strong down day following the engulfing. Average volume and lack of strong follow-through suggest the reversal may not happen immediately. Consider partial position or wait for stronger confirmation.