Engulfing Candles are the double candlestick patterns: the second candle’s body overlaps (engulfs) the body of the first candle.
Engulfing candles are one of the most popular candlestick patterns, used to determine whether the market is experiencing upward or downward pressure. Depending on the current market trend Engulfing Candles can be both Bearish or Bullish.
Bullish Engulfing Pattern: a bearish candle (red) followed by a bullish candle (green) of a larger size, which completely engulfs the body of the previous candle.
Bearish Engulfing Pattern: a bullish candle (green) followed by a bearish candle (red) of a larger size, which completely overlaps (engulfs) the body of the previous candle.
Both Bullish and Bearish Engulfing candles can indicate that the market is about to change direction. If the Bullish Engulfing Pattern occurs during a downtrend, it may signal a reversal upward. Similarly, if the Bearish Engulfing Pattern follows the bullish candlesticks, it may indicate the upcoming reversal downward.
Bullish Engulfing provides the strongest signal when appearing at the bottom of a downtrend and indicates a surge in buying pressure. Despite the dominance of the sellers when the second candle opens below the previous candle’s close (gap down), buyers are taking over. More buyers enter the market and drive prices up. So, the second candle closes above the previous candle’s open (gap up).
Bearish Engulfing is opposite to the bullish. It shows the strongest signal while appearing at the top of an uptrend and a surge in selling pressure. The bulls still have an upper hand when the second candle opens above the previous candle’s close. Yet, they cannot maintain the dominance and give up to the sellers, who push the price down. The sentiment is changed when the second candle closes below the previous candle’s open.
The larger the second candle in both patterns, the stronger is the reversal signal. To be valid, the patterns require the next candles to confirm the reversal.