In our last lesson we looked at two candlestick patterns which represent an indecisive moment in the market and can also represent a potential trend reversal when seen during an uptrend or downtrend in the market and are known as the spinning top and doji candlestick patterns. In today’s lesson we are going to look at two more candlestick patterns which also can represent potential reversals which are known as the Bullish and Bearish Engulfing Patterns.
The Bullish Engulfing Pattern
The Bullish Engulfing pattern is another candlestick formation which represents a potential reversal in the market when seen in a downtrend. The pattern is made up of a white and black candle where the latest candle (the white candle) opens lower than the previous candle’s (the black candle) close and closes higher than the previous candle’s open. When this happens the current period’s white candle completely engulfs the body previous period’s black candle.
Unlike the Spinning Top and the Doji we learned about in the last lesson, the Bullish Engulfing Pattern represents not indecision in the market, but a situation where the control has shifted from sellers to buyers. The long body of the current candle completely engulfing the body of the previous candle to the upside is representative that the buyers have not only taken control, but have taken control with force. As such, when this pattern is seen during a downtrend in the market it is seen as a potential sign that the trend may be reversing.
There are several instances where traders will normally see greater potential for a reversal which are:
The longer the white candle and the smaller the black candle which precedes it the greater the potential for reversal
When the white candle completely engulfs the black candle that precedes it
When there is large volume during the period in which the white candle forms
The Bearish Engulfing Pattern
The Bearish Engulfing Pattern is a Mirror Image of the Bullish Engulfing Pattern so the same rules apply, just in reverse. The Bearish Engulfing pattern when seen in an uptrend is representative of a potential reversal of that trend. The pattern is made up of a white and black candle where the latest candle (the black candle) opens higher than the previous candle’s (the white candle) close and closes lower than the previous candle’s open. When this happens the current period’s black candle completely engulfs the body of the previous period’s white candle.
There are several instances where traders will normally see greater potential for a reversal which are:
The longer the black candle and the smaller the white candle which precedes it the greater the potential for reversal
When the black candle completely engulfs the white candle that precedes it
When there is large volume during the period in which the white candle forms
That completes our lesson for today. In tomorrow’s lesson we are going to learn about two more candlestick patterns which are also potential reversal patterns known as the hammer and the hanging man candlestick patterns so we hope to see you in that lesson.
