Video Transcription: Steps to Make a Profit from Bullish and Bearish Engulfing Patterns
Hello guys, top rated forex brokers here, and we move forward with an interesting strategy to trade. Bullish and bearish engulfing. As you can see on the screen we deal with candlestick techniques and candles, therefore, one of the most powerful candlestick techniques is the engulfing pattern.
(0.21) Before anything you have to imagine this one relates to the stock market. It was invented on the stock market. On the FX market, it worked for years, it still works, but you have to be very careful with the time frame.
(0.39) Because now, the Spread, or the difference between the bid and the ask price, let me show this to you on the MetaTrader. The difference between the bid and ask price is so small that the conditions for an engulfing pattern are not there anymore. Look at the US Dollar and Swiss franc, 97520 to 97527 which is 0.7 Pips. Look at the euro-US dollar. It is 0.3 Pips.
(1.06) It is difficult to create an engulfing pattern on a bigger time frame, because if you look at the weekly chart; so let’s go to the weekly; this is the US dollar and Canadian dollar. Let’s go to the end of it and zoom in.
(1.25) With a bullish engulfing pattern or a Bearish one, you need to have a difference between the opening candle and the closing one in such a way that it will engulf the previous one.
The pattern looks like this. With a Bullish engulfing, (starts to draw) you have the body of a candle, let’s say that this is a candle, and let’s make it red so that we know it is a bearish candle.
(1.56) And then of course a red candle, with a shadow somewhere around here. Let’s make the body of it bigger like this, so this would be a red candle. then the next candle that comes, which is this green one, should totally engulf the red one like this.(green candle on screen)
(2.23) It doesn’t matter the length of the shadow, what’s important is the two bodies here (circles them). This one totally eats into the previous one. For a bullish engulfing pattern like this one, you need a Bearish trend. And then the market, of course, reverses into a Bullish tsunami. The same is valid the other way round.
(2.51) At the top, you have what? At the top, you have a strong Bullish candle followed by an even stronger bearish candle, but a candle that completely engulfs and eats into the previous one. What do we need for a candle to engulf the previous one? A gap.
(3.14) Because if this is the closing of the previous candle. And the opening price of the other one should be a bit higher to totally engulf this one, because if the opening price is here (top right of green candle), then it will not engulf this one.
(3.32) An engulfing pattern is typically a subject for the stock market. Because, when the stock market opens every day there is a gap and therefore the pattern works nicely.
(3.44) But it works on the FX market as well, let me show it to you right here on this US dollar Canadian chart. At the top the 1.46 which is on the weekly chart. The market closed or dies.
(4.00) At the opening, and this is the opening price of the new candle, and you look here at the OHLC, and closing price on the OHLC is 1.4533 and then on the new candle the opening price is 4601 which is 48 pips difference.
(4.30) So the market gets high at the opening of the new week, and closes lower on the trip; totally engulfs the previous candle. Now that is as bearish as bearish can be.
(4.42) This is called a Bearish engulfing pattern, and it shows the start of a new trend. There are two approaches to trade the Bearish engulfing or the Bullish one. To simply measure the length of the stronger candle, then to wait for a pullback.
(5.08) Ideally, you will see a pullback come into its territory about 50% 61.8% but that is not mandatory, and you might end up missing the whole point. Aggressive traders that don’t want to lose such an opportunity will go short at the closing of the second candle.
(5.31) And we will use any opportunity here to ebb on the same position. To know or to have an idea what this means for the overall reversal pattern, then the bigger the timeframe here, the more powerful the reversal will be.
(5.50) In this case, It’s a weekly chart, so if you zoom out and look at the market. So after the Bearish pattern here, imagine you go short here.
(5.59) Stop loss at the highs, even if it is on the weekly chart, the stop loss on the highs would invalidate the pattern, and you still have a risk-reward ratio of 1 to 2 or 1 to 3 for a US dollar pair, and that is quite something.
(6.20) From two simple candles, this is how Bullish and Bearish engulfing work. On the lower time frame it is very difficult, because rarely the market gaps on the hourly chart, for example, when the new candle opens, you have got to be careful with these patterns. Use them from the daily chart and the bar. These are beautiful patterns, so let’s move on to the next video.
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