The Engulfing Candle is one of the simplest and possibly most underrated chart patterns in trading.

In this tutorial, I'll show you how to identify the pattern, what it tells us as traders and I'll give you some trading strategies that use this pattern.

Many people over-complicate this pattern, but it's very simple.

There are basically 2 types of Engulfing Candles.

Here's how to identify them. 

Bullish Engulfing Candle

A Bullish Engulfing candlestick pattern signals a potential reversal from a downtrend to an uptrend.

Here's what to look for:

• 2-candle formation
• First candle is smaller than the second candle and the close is lower than the open
• Second candle has the largest candle body that has been seen in awhile and the close is higher than the open
• The high of the second candle is higher than the high of the first candle
• The low of the second candle is lower than the low of the first candle
• The second candle closes near the high of its range
• This pattern has to print on a support or resistance level

Examples

Here is an example of a Bullish Engulfing pattern on a Bitcoin chart. The blue arrow shows the Engulfing Candle. 

Notice how this was a dramatic turning point on the chart.

This obviously won't happen all the time, but it does happen frequently enough that you should pay attention.

Here's a second example on the USDCHF Forex pair.

This one rallied hard after the pattern printed on a previous support level.

So those are just a couple of examples of when a Bullish Engulfing Candle can signal an upward move in a market.

Now let's take a look at the opposite of this pattern.

Bearish Engulfing Candle

A Bearish Engulfing candlestick pattern signals a potential reversal from a downtrend to an uptrend.

Here's what to look for:

• 2-candle formation
• First candle is smaller than the second candle and the close is higher than the open
• Second candle has the largest candle body that has been seen in awhile and the close is lower than the open
• The high of the second candle is higher than the high of the first candle
• The low of the second candle is lower than the low of the first candle
• The second candle closes near the low of its range
• This pattern has to print on a support or resistance level

Examples

This example on the AUDNZD chart shows how fast price can move after a Bearish Engulfing candle pattern.

Notice how it prints on a previous level of resistance.

Now here's an example on the NZDCAD chart.

Again there was a sharp move after the engulfing candle prints on the resistance zone.

Take any chart and start looking for this pattern.

You'll notice that it happens more often than you might expect.

But don't stop there.

Be sure to test this pattern out before risking real money.

My Favorite Engulfing Candle Resources

Here are resources for Engulfing Candle trading strategies that I've found super useful.

You can use them to help you create, test and trade Engulfing Candle trading strategies.

• Naked Forex: High-Probability Techniques for Trading Without Indicators – This book teaches a trading strategy called The Big Shadow that uses Engulfing Candles.
• Naked-Markets Backtesting Software – This software will identify Engulfing Candles and can pause the backtest so you can manually enter a trade, or automatically enter a trade that you have an automated entry created. Saves a ton of time when backtesting.
• Engulfing Bar Alert Indicator for MT4 – Get alerts on your screen or mobile app when an Engulfing Candle prints.
• TradingView – Setup alerts for Engulfing Candles by using the built-in indicators.

How to Prove Engulfing Candles Actually Work

At this point, you're probably wondering: Does this actually work?

That's a perfectly natural question and the only one that matters, quite frankly.

So here's the truth about trading Engulfing Candles…

Just like with any other trading method, the success of the chart pattern will be determined by the specific trading plan.

There are many ways to enter and exit trades with this pattern, so you need to define these parameters in order to have a real trading strategy.

I'll provide specific trading strategy plans in the next section. 

But here's where most traders get tripped up…

Remember, there are only 2 types of trading strategies, discretionary and fully automated.

Most Engulfing Candle strategies are discretionary.

Therefore, the results can vary greatly between traders.

So it is essential that you backtest it for yourself to find out how good you are at identifying the setups in your trading strategy plan.

Practice can also improve your skills, so don't be afraid to keep running through simulations until you feel you've maxed out your potential.

Now it might be possible to automate an Engulfing Candle strategy. If so, then the results are usually reproducible between traders.

Even then, you still have to create an automated strategy and test it on every market/timeframe you trade.

Always verify, never take another person's word for it.

Remember, profitable trading strategies usually start out as very unprofitable ideas.

So start experimenting and don't be afraid to test your own ideas.

You just might discover something amazing.

Trading Strategies That Use Engulfing Candles

Here are some trading strategies that you can review and start testing for yourself.

I've also included my own backtesting results so you can compare notes and make improvements on these strategies.

• Coming soon

Final Thoughts

This super simple candlestick pattern could be the basis for your next grail trading strategy.

It is easy to identify and can be programmed into most trading platforms.

But it's up to you to test it out and find out if it will work.

Remember, the most profitable strategy in the world is the one that fits YOU best.

Now get to work. 

The post Beginner’s Guide to the Engulfing Candle Chart Pattern appeared first on Trading Heroes.

Are Pin Bars magic?

There is a lot of voodoo out there when it comes to candlestick chart patterns. Some of it is very useful, but most of it is hype.

So this is one post in a series of posts exploring candlestick patterns that are actually practical.

More importantly however, we will go into WHY they are useful trading clues.

We won't just settle for:

Some rice trader dude 300 years ago said that they work, so we are just going to listen to him.

These patterns are not trading systems in themselves. Be very clear on this point. 

However, when they appear in the right context, they can be useful.

…and the best part is that they can easily be backtested.

But not every Pin Bar is a potential trade.

In this post we will take a closer look at Pin Bars.

They are also known as kangaroo tails, hammers and probably some other names that I am not familiar with.

The term Pin Bar was first coined by Martin Pring. I initially thought that it was called a Pin Bar because it looks like a pin.

But he actually called it that because it is a “Pinocchio Bar” or a bar that is telling a lie.

Here's what he means by that…

What Pin Bars Look Like

Some people try to get all crazy and define a Pin Bar with a super strict, complicated formula.

The wick has to be twice the length of the body, there cannot be a wick on the other side…blah, blah, blah.

They also overanalyze the “nose” and everything about the candle.

In my opinion, you should keep the definition as simple as possible.

More on that in a bit. 

But before we get into some examples of Pin Bars, if you are not familiar with candlesticks, the diagram below shows what they represent.

On most Forex charts, a green candle means that the close was higher than the open, and vice versa for a red candle.

Remember that trading is not an exact science and general concepts will get us much further than absolutes, so we are just going to say that a pin bar is any candlestick with along wick.

Here are two examples:

I personally look for a wick that is 66% of the body, just so that I have something to put into my Pin Bar Alert Indicator.

But I don't always stick to that definition.

You should be willing to be a little flexible.

Backtest a few values and find out what works best for you.

Why Pinocchio Bars Happen

Now that we have the basics out of the way, let's get into the psychology of why they form and why they can be a good predictor of price direction.

A long wick signifies that the market was pushed relatively far in one direction…

Then price was pushed back in the opposite direction, just before the candle closed.

It means that price was not able to hold the momentum in the initial direction.

This can be a clue that price will reverse at the candle.

Think of it as a battle between the bulls and the bears.

When the bulls push price hard to the upside, and the bears are able to push price back, that shows that the bears are firmly in control.

How They Can be Traded

But keep in mind that it is just that…a clue.

You have to take a look at the bigger picture and figure out how this Pin Bar fits into other price levels on the chart.

A common use is in conjunction with support and resistance levels or trending markets.

Here is a trend with the Pin Bars marked with a yellow triangle.

Notice how the bullish Pin Bars could have been good places to enter the market.

Although Pin Bars are not a trading system in themselves, they can be used to predict turning or continuation points in the market.

You also have to take the timeframe into account.

Pin Bars on higher timeframes like the daily or 4-hour charts tend to be more reliable than ones on the 1 minute chart.

Pin Bar Exercise

Now it's your turn. Go through your charts and find some examples of Pin Bars that worked out.

Also look for examples of Pin Bars that did not work out.

What do “good” Pin Bars have in common?

What do “bad” Pin Bars seem to have in common? 

If you don't have access to a chart at the moment, here is an example on the AUDCAD.

Conclusion

But what about a trading system? 

I purposely left out any Pin Bar trading strategies because I want you to make your own observations first.

We will get into potential trading strategies in future blog posts.

But for now, just go through your charts and write some notes on what you see.

You may even want to start taking screenshots and adding them to an Evernote note, for future reference.

There is nothing mystical about Pin Bars, they are just a graphical representation of potential price rejection levels.

If you are interested in creating a trading system around Pin Bars, do some testing and see what works for you.

If you need help getting started, learn Walter's Trending Kangaroo Tail method or read more blog posts.

Get started now!

To get MT4 alerts on your smartphone, every time a Pin Bar prints, be sure to get our custom indicator for Metatrader 4.

The post The Beginner’s Guide to Trading Pin Bars appeared first on Trading Heroes.